After the recent tech-led volatility, Mark Haefele, UBS Global Wealth Management chief investment officer, discusses the equity outlook, with a focus on artificial intelligence.

US equity performance has been choppy over the past week. The market rebounded on Tuesday after three sessions of losses, with the S&P 500 rising 0.4 per cent and the Nasdaq up 1.3 per cent. Notably, California-based tech company Nvidia, which drives artificial intelligence (AI) advances, gained 6.8 per cent, after a near 15 per cent decline from its peak the previous week.

Renewed volatility is not surprising, according to Mark Haefele at UBS Global Wealth Management, with surging AI revenues and capex being key drivers behind the recent all-time highs in US equities. But Haefele thinks Nvidia’s volatility shouldn’t be mistaken as a warning signal on either the structural investment case for AI or the broader equity outlook.

AI adoption continues with positive monetisation trends. Selling pressure on Nvidia follows milestones for its stock price and a share split, rather than any public change in its revenue or profit guidance. Haefele believes that other demand signals look positive, with Apple working to integrate AI into its consumer devices and to partner with model operators such as OpenAI.

Meanwhile, media reports suggest that OpenAI could be generating annualised revenues of  $3.4 billion, up from its previous disclosure of $2 billion. This follows stronger-than-expected monetisation trends during first-quarter earnings, where cloud platforms reported accelerating revenue growth. Haefele expects AI monetisation will be the key focus during the reporting in July.

“The robust foundation of AI sets the technology up for sustainable growth. Many of the companies investing most heavily in AI today are financially strong, with high-quality earnings, strong profitability, and healthy cash flows,” Haefele said. Markets are increasingly rewarding companies with expanding margins, and he believes that some of the largest AI beneficiaries should still be able to defend their margins with strong pricing power and solid innovation. This financial stability should reduce the risk of speculative bubbles in the industry.

AI is not the only driver for equity performance this year. Haefele sees a constructive backdrop for the market – including solid earnings and economic growth, and a likely pivot in the Federal Reserve’s monetary policy later this year. He forecasts 11 per cent earnings' growth for the S&P 500 this year amid a broadening rally, driven by companies with exposure to structural growth trends.

So, without taking any single-name views, Haefele maintains his positive view on the AI story, but believes rightsizing tech exposure is key to navigating volatility while maintaining exposure to the technology, which he thinks is set to drive growth in the coming years. “Investors can utilise structured investments with capital preservation features for more defensive positioning, or consider exposure in laggard markets such as South Korea,” he said.

Beyond tech, Haefele sees quality growth opportunities in global quality wealth compounders, Europe’s Magnificent 7 (ASMIL, SAP, Ayden, RELX, Infineon, STMicroelectronics and Capgemini), select benchmark heavyweights in Asia, and firms exposed to the energy transition, the ocean economy, and water scarcity.

Ian Mortimer and Matthew Page at London-based Guinness Global Investors also see investment opportunities in innovation and artificial intelligence – areas which are playing an increasingly important role in the sector. The managers have identified nine innovation themes in the Guinness Global Innovators Fund, notably advanced healthcare, AI and big data, clean energy and sustainability, cloud computing, internet, mobile tech, next gen consumer, payments and fintech, robotics and automation. They focus on companies exposed to these themes. See more commentary here.