Broadening beyond AI

The AI investment cycle is no longer the only story driving equity markets. The shift that is underway is the return of competition for investor attention beyond all things AI.

For much of the past few years, equity markets have effectively traded around one theme: a small group of companies benefitting from the same direction of travel. Geopolitical conflict, an energy shock, and a more hawkish tone from central banks have done little to disrupt it. What is beginning to change is not the strength of the AI investment cycle, but that it is no longer the market’s only source of growth, or story.

Willis Tsai, Nuveen’s Global Head of Equities, frames the AI investment cycle through three questions: 

1. Is demand real?
2. Who is capturing the economic returns today?
3. Who ultimately captures the value created by the infrastructure now being built?

The first two have relatively clear answers. Demand is proving to be robust, reflected in growing backlogs and capacity constraints rather than sentiment alone. The returns, meanwhile, remain concentrated among semiconductor companies and hyperscalers, with the latter increasingly financing investment through debt and equity markets rather than cash flow alone¹.

The real case to sustain a broader market

It is the third question that matters most for investor positioning. Which companies, beyond technology, across financials, healthcare, industrials and other sectors, are beginning to show measurable revenue growth, margin expansion, or productivity gains from embedding AI into their operations? Tsai calls this the real case to sustain a broader market. There is no screen or top-down basket that can provide the answer. What needs to be assessed is how individual companies are investing and whether that investment is generating a return.

Signs that the opportunity set is widening

Earnings momentum is extending beyond the largest technology companies, with revisions improving across a much wider range of sectors this quarter². While the earnings picture does not yet amount to a durable rotation, it suggests the market is moving from the infrastructure phase of AI towards the more difficult question of adoption and, ultimately, monetisation.

That broadening is also exposing areas that markets have spent years overlooking. Energy, industrials, and materials have fallen from ~32% to ~21% of global market capitalisation over the past two decades³. Nuveen’s global equity team has strong conviction across all three, not as a top-down macro call, but because bottom-up research continues to find opportunities in sectors the market has largely written off.

The same logic applies geographically

European and Japanese companies trade at historical discounts to US peers, yet many are global businesses whose revenues extend well beyond their home markets⁴. Valuation gaps alone are not an investment case, though alongside improving earnings prospects, warrant increased and selective allocations. 

The macro backdrop also supports a more nuanced view. Manufacturing surveys remain expansionary across parts of the developed world including Europe, while China’s economy, although clearly softening, has continued to absorb prolonged property and construction weakness. Neither point to strong global growth. Both suggest an industrial backdrop with more resilience than the AI-dominated market narrative implies.

There is a broader resilience argument beneath these developments 

That matters as broadening requires an economic backdrop capable of sustaining it, not just greater earnings dispersion.

Energy markets have absorbed shocks long feared as capable of derailing global growth. First, the conflict involving US and Iran and severe disruption to shipping through the Strait of Hormuz. China relied on accumulated crude inventories, while the wider industrial economy had already endured a prolonged downturn, a US manufacturing recession and stop-start European growth⁵.

That is not an argument for complacency. Oil prices remain elevated, inventories have been depleted and further disruption would carry economic consequences. But it does suggest that the global economy has more flexibility built into it than markets may have assumed.

For investors, the implication is not simply to replace technology with a basket of cheaper sectors. Market concentration remains high, and many of the largest index constituents are exposed to the same underlying investment cycle. Benchmark exposure captures that AI theme efficiently but offers limited diversification away from it.

With market leadership already broadening, the next question is which companies, sectors and regions can convert higher investment and greater economic resilience into sustained earnings. That places a premium on company-level research rather than capturing a broad rotation trade through index exposures.

Bottom line

None of this suggests that the AI theme is fading. Spending intentions remain strong, and the companies leading the cycle have every reason to defend businesses worth hundreds of billions of dollars. The question is whether they remain the only meaningful source of market returns.

While the evidence is still developing, broadening earnings growth, relative valuation gaps and a global economy that has absorbed repeated shocks suggest the opportunity set is becoming less concentrated, even if focus on the AI trade is not.