AI’s big questions –
Artificial intelligence (AI) offers great promise and has spurred heavy investment. But how could the economy change? Over what timeframe? And who will reap the rewards?
BlackRock Investment Institute’s latest research paper delves into these questions and explores what it all means for investors, providing insights into the investment opportunities and challenges presented by the new “intelligence revolution” era.
Key takeaways:
- AI has captured investor attention. We don’t think this is short-lived hype: we believe AI could radically reshape economies and markets.
- Yet no one knows exactly how AI will evolve. It raises many big questions, not all of which have answers now. We use our three-phase framework — buildout, adoption, transformation — to track progress and help us adjust portfolios along the way. We take an active investment approach to capture AI’s opportunities.
“Investment across AI and traditional data centers and related power infrastructure could surpass U.S.$700 billion a year by 2030, based on the top end of projections. That’s equivalent to over 2% of annual U.S. GDP. It’s also more than the entire U.S. private sector currently invests in information processing equipment, and on par with what the U.S. spends on research and development each year. The sheer amount of capital needed to enter this space gives mega-cap tech companies a significant competitive advantage. More broadly, the scale of AI infrastructure buildout demands significant financing, creating a critical role for capital markets to mobilize the required capital — and opportunity for investors, in our view.” –
The macro implications
- Estimates of AI’s contribution to broad economic growth range from modest to substantial, underscoring high uncertainty around how AI will evolve.
- In the near term, AI may yield modest productivity gains by helping workers be more efficient. Longer term, AI’s potential to drive innovation in innovation itself could be transformational, expanding knowledge and supply capacity, possibly easing inflation and boosting growth.
- We’re in phase 1 now: the buildout. As AI models become exponentially more complex, annual investment into AI data centers and their chips could surpass U.S. $700 billion by 2030 – equivalent to 2% of annual U.S. GDP. Investment on this scale creates a vital role for capital markets and a compelling opportunity for investors, in our view.
- Such spending could add to inflation, including via higher near-term energy costs: AI’s massive power needs could strain energy grids in the near term, potentially slowing AI’s progress. Efficiency gains may later offset some of the initial spike in energy demand.
- In phase 2, we see AI rolling out unevenly across sectors, potentially redefining production, work and consumption. This could create new jobs and evolve existing ones, but the labor market will need time to adapt.
The investment implications
- We believe AI will generate new revenue streams, though it’s uncertain who will capture the most value – the providers of AI infrastructure or the developers leveraging it to create innovative AI-powered apps.
- Investment opportunities span the “tech stack”, from cloud infrastructure and chips to applications, with significant potential now in foundational layers where expertise and capital are concentrated. We spotlight how one of our tech portfolio managers is navigating AI on pages 8 and 9.
- In our view, parallels to the dot-com bubble fall short: tech earnings quality and capital efficiency are stronger today, according to analysis from our Systematic Active Equity team. And unlike the dot-com era, robust earnings support today’s mega-cap valuations.
- Equity market concentration today reflects a “winner-takes-all” feature of AI, we think. If market concentration is driven by underlying transformation, it does not need to imply market fragility, in our view.
- We think questions around AI overinvestment are valid, but the payoff likely lies years ahead. Big tech’s capex levels appear sustainable to us, with expected revenues likely to offset these investments far faster than in the dot-com era. In our view, overinvestment should be assessed in aggregate, given AI’s potential to unlock new revenue streams across the whole economy.
- Private markets may offer exposure to early-stage growth companies driving AI adoption in non-traditional sectors. An active investment approach with strong technical knowledge is, in our view, crucial to identifying future winners across industries, including utilities, industrials and real estate
Spokesperson – Ben Powell, Chief Middle East and APAC investment strategist, BlackRock Investment Institute
