The year 2023 saw the tech industry’s giants, particularly those driving artificial intelligence (AI) innovations, emerge as the stars of the market. As the S&P 500 Index closed with a 24.2% price return, the leading “Magnificent Seven” tech stocks outshone the benchmark with gains ranging from 48% to a staggering 249%. While concerns about a potential slowdown in AI-fueled gains in 2024 exist, UBS remains optimistic, presenting a compelling investment case for AI and related companies. Here’s why the bank believes that the momentum will not only continue but strengthen in the coming year.
AI Revenue Forecasts:
UBS is bullish on AI, revising its revenue forecasts to project a 15x growth between 2022 and 2027. Initially estimating industry revenues to reach USD 300 billion by 2027, the bank now anticipates a more ambitious USD 420 billion—a 72% annual growth rate and a fifteenfold increase in just five years. This upgrade reflects the heightened demand for AI and increased clarity on company spending plans, contributing to a robust compounded annual growth rate of 61%.
Corporate Spending Plans and Infrastructure Investment:
Clearer corporate spending plans in 2024 are expected to fuel expanded AI infrastructure spending. UBS identifies the markets for chips and GPUs as the primary beneficiaries, with businesses providing transparency on their AI investment intentions. The increased use of generative AI and applications like copilots is projected to boost AI chips spending, leading to a substantial market growth from USD 2.2 billion in 2022 to USD 225 billion by 2027—a near 152% compound annual growth rate.
Regulatory Focus:
Despite the growing regulatory focus on AI, UBS views this as an opportunity rather than a threat in 2024. Anticipating increased debate and rule-setting, the bank believes that clearer regulatory frameworks, especially in the early stages of technology development, are preferable. While acknowledging potential corrections due to geopolitics or regulations, UBS sees them as buying opportunities, given the solid underlying demand trends for AI.
AI Trends Supporting Technology Stocks:
UBS maintains a most preferred stance on the US technology sector, with a particular focus on the semiconductor and software industries. These sectors, with a combined market cap of over USD 10 trillion, are deemed the best ways to ride the strong and improving visibility for AI. Semiconductor firms are well-positioned to benefit from solid near-term demand for AI infrastructure, while software firms, with their strong recurring revenue bases, stand to gain from broadening AI demand trends for applications and models.
