AI and the Current Market Environment for Tech Stocks

How would you characterise the environment for tech stocks today?

When I look at the general market backdrop, I think it's quite positive for the technology sector. On one hand, in the US we have monetary stimulus in the form of interest rates coming down. On the other hand, we have fiscal stimulus in the form of the One Big Beautiful Bill and the ability to 100% expense your capex on your taxes in the US. This coupled with the high ROIs [Return on Investment] that we're seeing on the AI infrastructure spend and the general competitive intensity increasing amongst the US technology hyperscalers, I think, is resulting in a sustainable general infrastructure boom for AI. AI seems to be driving the market right now, and I think it has every reason to be. It has the potential to be the biggest productivity enhancer for the global economy since electricity. Now, the thing about productivity enhancing technologies is that they historically come with speculative bubbles, and our job is to navigate those speculative bubbles responsibly for our clients by following our investment framework.

Which areas of the market are you most excited about?

The area of the technology market that I'm most positive on today is AI, semiconductors, and the entire digital semiconductor supply chain. Let's take a step back. The AI chip market is going from US$45 billion in 2023 to US$500 billion in 2028, to upwards of US$1 trillion in 2030. That comes at very high incremental operating margins for the entire digital semiconductor ecosystem. And to put it into context, the entire semiconductor market last year was only US$500 billion. So we're adding a whole new layer of growth to this industry. Going forward, the big question for everybody is, are we going to see continued high ROI on this general infrastructure spend? And so far, I think the answer is a resounding yes. Whether it's an acceleration of the core businesses of the most profitable companies in history, or the rise of startups using AI to scale faster rates than ever before. I think this AI infrastructure spend is coming with very high revenue numbers associated with it, which makes it more sustainable over the long term.

Where are you more cautious on the outlook?

When you look at the technology backdrop, the area of tech that is clearly changing the most is in software and IT services. And why is that? Well, the business models have to change. In traditional software, they're historically seat based models. You pay per user of the software. Going forward though, because of AI bringing so much productivity to organizations, companies are going to be able to do more with less. And as a result, that traditional seat based model is not as powerful for the software vendors.

In addition, the power in the software ecosystem has historically rested in the systems of record vendors, but that's changing rapidly as we're trying to pull the data out of those systems of record and into the AI models. And as a result, the data infrastructure companies are more important than ever before.

And finally, when we used to implement applications of software, it would be done with a bunch of IT service vendors who would frankly throw a bunch of people at the problem and try to use those people's technology skills in order to integrate the software, adapt the software to the local environment going forward. A lot of that can be done with AI because of all the generated coding that we can do, and as a result, the business model for the IT service vendors needs to change as well. And whenever you're changing business models, it's a very difficult backdrop. So right now, as I see it, the semiconductor ecosystem looks like a more sustainable investment trend than the software ecosystem. Historically, you'd go through decade long periods where the hardware has the power, where the software has the power. And I think we're in one of those periods where the hardware has the power today.