"The AI maximalists should have the support of investors"

Polar Capital is optimistic about AI and thinks it is not yet in a bubble

The investment elite in Britain is adamant that the US market, and especially the tech-focused "Magnificent Seven" stocks, is a bubble that will burst when the "hype" surrounding artificial intelligence fades. Fearing a recurrence of the collapse of 2000 - 2003, they are terrified by the size and velocity of the bull market, which they were unable to predict.

They think differently in the United States. According to seasoned strategist Ed Yardeni, the Magnificent Sevens' market share of the SandP 500 has doubled to 32 percent since the end of 2022, and its percentage of corporate earnings has increased from 13 to 23 percent. Information technology and communication services now make up 37% of forward earnings, up from a peak of 24% in early 2000, but their share of the S&P index has just surpassed the peak of 40%. The pessimists on this side of the Atlantic will continue to be let down as long as the tech industry and the S&P 500 continue to grow in terms of earnings.

The maximalists in AI.

It is nearly counterintuitive for the team in charge of the 5 billion Polar Capital Technology Trust (LSE: PCT) to be bullish given the pessimistic UK consensus. The team, according to lead manager Ben Rogoff, are "AI maximalists" who have centered the portfolio around their belief that AI will transform the world. He claims that since April, AI winners have performed 50% better than AI losers. This is the reason for the trust's 36% return, as opposed to the tech sector benchmark's 27%. In contrast to a benchmark return of 5%, the trust only returned 3% during this unimpressive year.

However, Rogoff cautions that volatility is to be expected, saying that "it's pretty normal in a time of change." There were seven setbacks of more than 15 percent during the bull market that lasted from 1995 to 1998.

"You will only hear bad things about AI," he claims, "but we vehemently deny that we are living in an AI bubble; rather, we are living in a time of revolutionary technology. Improvements happen very quickly during times of revolutionary change. Skyscrapers and a 42-meter building height increase were made possible by Otis's invention of lifts in 1885. This was multiplied ninefold to 381 meters by the Empire State Building, which was finished 46 years later.

Rapid advancement in AI.

While the global wage bill was £44 trillion last year, £51.4 trillion was spent on information technology worldwide. The market opportunity is located there. With 700 million weekly users of OpenAI and one billion for Meta AI, artificial intelligence has grown rapidly and swiftly established itself as a business necessity. For a brief moment, investors were surprised by China's DeepSeek's sudden entry into the market, but Rogoff believes it is only a step forward and that the price will eventually fall. This is not a flaw in the tech model; rather, it is a feature.

Between 2023 and 2027, a compound annual growth of 40% is anticipated in the capital expenditures of the biggest tech companies. According to Rogoff, "They wouldn't be spending this if DeepSeek was an issue." However, less than 1% of US GDP is still allocated to AI capital expenditures. "Railway capital expenditures reached 3 percent in the 19th century" in contrast.

Others see AI as a threat, while others see it as an opportunity. In 2015, Intel, the most successful semiconductor company at the time, began to lose investors' trust "when they realized it wouldn't be the conduit to the world of cloud storage." Since "the market is a discounting mechanism and so looks well ahead," software companies Adobe and Chegg are now AI casualties. AI is growing more quickly than Moore's law. Moore's law refers to the cofounder of Intel's 1975 prediction that the number of transistors on a microchip would double every two years, indicating a trend toward an increase in computing power. ).

An extensive portfolio with a focus on AI.

Although "almost all explained by our AI focus," the trust's portfolio consists of 90110 stocks, and "we are not afraid to have zero weightings in firms in our benchmark." With a wide portfolio, managers can hold benchmark or underweight positions in companies in which they lack strong conviction, like Oracle, which recently saw a nearly 40 percent increase in value in a single day, and Palantir, which is extremely expensive, but "you have to look at the scale of the opportunity." Although quantum computing has made great strides in the past two years, it is still pre-revenue and at least five years away from profitability, despite being an exciting technology.

Less than 1% of the portfolio is in the UK, and almost 75% of the portfolio is inevitably listed in the US. Additionally, 97% of the portfolio is in companies with a market valuation of at least £10 billion. We have a limited valuation premium for twice the index's growth. The Magnificent Seven comprise one-third of the portfolio, but "we expect that to come down." Prevent a hold at your own risk.