Why investors should prioritize durable growth when the market does not

Rapid advances in artificial intelligence (AI) and its broad applicability can cause imaginations to run wild about the implications for products, companies, and industries.

In such a dynamic environment, the market is prone to extrapolating recent news or a datapoint into a trend. There is also a tendency to rush to judgment about whether companies are AI winners or losers at any given moment.

The resulting dislocations and bouts of volatility can feel extreme. However, the market’s bias toward chasing whatever narrative is working today can lead to opportunities for patient investors who focus on what creates value over the long term.

AI infrastructure spending: What we’re watching

So far, much of the value created by AI has accrued to the hardware layer, fueled in large part by the massive sums that the hyperscalers have plowed into datacenters (Figure 1).

Key tailwinds propelling the AI spending cycle are blowing in the right direction:

• AI Scaling laws: As long as linking increasing numbers of increasingly powerful chips still yields meaningful advances in model capabilities, the impetus to pursue frontier intelligence that can unlock new use cases should be strong.
• Change agents: AI agents that can complete complex digital tasks have super‑charged demand for processing capacity. Agentic AI increases the need for memory to hold more information in context for longer and traditional CPUs to run and coordinate myriad computing tasks.
• Return on investment: The mega‑cap companies driving AI infrastructure spending have benefited from acceleration in their online advertising and cloud services businesses without meaningful headcount growth. AI agents have also experienced strong uptake among consumers and enterprise users.
• Funding environment: The hyperscalers have demonstrated a willingness to issue debt and, in some cases, equity to augment their spending plans.

Still, it’s important to respect that the AI technology stack and market are evolving quickly. Navigating this cycle responsibly, in our view, requires selectivity and thoughtfulness about the magnitude and durability of a company’s growth story.

AI‑driven growth: Magnitude matters, but so does staying power

The AI arms race has led to supply‑chain bottlenecks, turning shares of some hardware companies into bottle rockets as they benefited from supply‑demand shortfalls and strong price increases.

Outsized growth can be dazzling. But durability and business quality shouldn’t be overlooked. Customer concentration and whether a company’s pricing power has staying power are key considerations.

Innovation is relentless. Hardware prominent in current system architecture may find itself replaced in subsequent generations by more efficient or more powerful components developed by rivals.

And aggressive price increases based primarily on scarcity historically have proved less defensible. Elevated prices typically incentivize producers to invest in additional capacity while encouraging customers to seek substitutes or other workarounds over time.

Within the hardware industry, we favor companies with leadership in bleeding‑edge technology and foundry capacity for manufacturing advanced semiconductors—an area where demand and pricing power tend to be more durable through the cycle. All roads to producing high‑performance chips run through these “linchpin” companies; they typically benefit no matter which technology or system architecture appears to be winning.

Meanwhile, much has been made of the AI infrastructure players siphoning the hyperscalers’ ample cash flows.

But we believe hyperscalers’ spending can create significant value in their cloud businesses, which are adding AI‑related workflows that are likely to prove sticky, grow, and generate favorable returns over a longer time frame.

The market may not fully appreciate the potential durability of the hyperscalers’ business models while their free cash flow is under pressure and hardware companies benefiting from bottlenecks offer the prospect of impressive near‑term earnings growth. In our view, this dislocation creates a favorable risk/reward setup for patient growth investors.

AI disruption: What we have here is a failure to differentiate

As with past innovation waves, the specter of disruption looms large, with the market reassessing whether AI threatens individual companies or even entire industries.

Traditional enterprise software, for example, has emerged as the poster child for AI risk. Concerns include intensifying competition, eroding pricing power, and pressure to pivot from subscriptions that generate recurring revenue to utilization‑ or returns‑based models. Disproving these allegations could be challenging, and the range of potential outcomes has widened. We believe caution and selectivity are warranted when considering software stocks.

Worries that agentic AI could disrupt e‑commerce, on the other hand, generally strike us as misdiagnosed. The bear case holds that AI agents increasingly will handle online shopping as well as travel bookings and associated logistics.

We believe that consumer‑focused AI is likely to monetize through online advertising. In this scenario, AI is more likely to help consumers discover products and services than to replace the economic role of established marketplaces and infrastructure.

Alphabet (Google’s parent company), for example, tried to compete with the online travel agencies for decades but ultimately concluded that it was easier to route traffic to them. These businesses proved harder to disrupt than information companies because of their real‑world relationships, network effects, and their integrated payments and customer service.

Ultimately, front‑footed online travel agencies and companies that provide backbone digital services for e‑commerce may benefit to the extent that deploying AI helps them to lower costs, accelerate innovation, and improve the customer experience.

Bottom line: AI’s broad applicability can easily lead to misplaced fears of disruption, creating opportunities for portfolio managers with a differentiated view on the potential durability of a company’s growth story.

Beyond AI: The overlooked appeal of “boring” growth stories

The market’s enthusiasm for AI and appetite for speculation have resulted in an excluded middle: companies that lack an exciting story but should be able to increase their earnings at an above‑average rate for an extended period.

Companies with the potential to grow steadily and grind higher over time should represent an important part of a balanced portfolio given that sentiment and momentum around the AI trade can shift quickly.

Within financial services, for example, the dominant global payment networks historically have generated significant free cash flow and stand to benefit over time from strong pricing power and the continued migration from cash to cards and digital transactions.

The aerospace market is another area where we see high‑quality companies that should have a long runway for earnings growth.

Investing with confidence

Narrative‑driven markets and periods dominated by short‑term factor rotations often create opportunities for fundamentally driven investors.

A deep understanding of individual companies can help portfolio managers to capitalize when dislocations emerge in high‑quality companies that have the potential to sustain stronger earnings growth for longer.