AI is shak­ing up mar­kets – what now? Stay the course

Artificial intelligence (AI) is currently challenging business models as well as markets’ intelligence. Opinions on whom it will disrupt and who will benefit change almost weekly. We are not letting this heightened nervousness affect us. We assume that the AI euphoria will continue, within an overall positive equity market environment. But we also believe it is difficult to invest in a broad AI-basket; stock picking is mandatory.

Major sector rotation at the start of the year

The strong start to the year in equity markets masks the fact that there is considerable turbulence beneath the surface. Many individual stocks are swinging sharply, with some falling 10% and more in a single day. Defensive sectors are outperforming growth stocks to a degree last seen during periods such as Covid, the financial crisis or the dot-com bubble. After seven weeks, consumer staples in the S&P 500 are up more than 10%, while the software sector is down more than 20%. The AI sector is rarely linear. Supposed certainties are overturned in the blink of an eye, and winners and losers change places. Investors are nervous. Still, these market movements are consistent with our conviction that we are not experiencing an AI bubble, but an AI boom, which the market is facing with “rational exuberance.”

Gold(AI)locks environment supports equities

A supportive economic backdrop continues to benefit stocks, especially those tied to AI. We expect solid economic growth and even stronger corporate earnings growth, with U.S. companies likely to see double-digit EPS gains in the coming years. In both the U.S. and Europe, expansionary fiscal policy and the prospect of stable or lower interest rates provide support to markets. We consider the risk that 10-year U.S. Treasury yields could settle above 4.5% to be very low, an important tailwind for growth stocks. The earnings season for the fourth quarter of 2025 showed that AI companies continue to deliver strong profit growth.

Rational exuberance – AI is a structural boom, not a bubble

AI’s momentum is set to continue in 2026. The five major “hyperscalers” are expected to increase their investments by more than 50 percent year-on-year, once again exceeding expectations. Many AI product launches have also beaten expectations, and a growing number of large corporations are reporting successful deployment of AI. AI is no longer a niche theme, but a cross-sector driver of revenue growth and/or cost reduction. Unlike during the dot-com era, we see pockets of overvaluation, but not a market wide bubble.  We call this “rational exuberance” because there is no sign of broad market overcapacity or dangerous levels of borrowing in the sector.  Google’s recent USD 32 billion bond sale, completed within 24 hours, illustrates how readily available funding for AI continues to be.

Avoid battlefields, focus on bottlenecks

Since the start of 2026, markets have repeatedly come down hard on entire sectors as soon as doubts emerged about the perceived resilience of their business models in the face of AI-driven disruption. This includes companies in software, data provision and processing, or digital marketplaces. As a result, software valuations have fallen with unusual speed and severity. We continue to steer clear of this battlefield, even if select providers of mission‑critical enterprise software may have stabilized. Our preference remains with companies operating in areas of structural scarcity, notably (Asian) semiconductor manufacturers, especially in memory, providers of AI‑enabling infrastructure such as electrification, and energy producers and distributors. These bottlenecks have another benefit: they also help limit the risk of excess capacity.

Overcapacity is possible even in growing markets

Along the extended AI value chain, bottlenecks and oversupply can co-exist. Market underperformance is therefore not limited to businesses directly threatened by AI disruption; it can also affect sectors where supply is growing faster than demand, which can even happen amid strong growth. Given the pace of AI development, today’s shortages can quickly turn into tomorrow’s gluts, causing even pioneers to stumble.

Seek regional diversification

We have recently downgraded U.S. equities and upgraded Japan and Europe. We believe that new equity flows will no longer be a one-way street into the U.S. stock market given the fear of AI disruption which is expected to limit further multiple expansion for the IT-heavy S&P 500. Global investors will continue to show a growing preference for diversification in equity portfolios across regions.

Volatility is no reason to avoid AI in equity markets

From an investor’s perspective, 2026 is likely to be shaped less by macro factors and more by sector and company fundamentals. Periods of pullbacks and heightened volatility – both within and across sectors – should be expected,  but they do not undermine the case for AI investments, as long as three principles are followed:

1. Let winners run: where growth and value creation are clearly visible, it makes sense to allow momentum to continue. We don’t believe equity markets will turn sour, as long as the current economic cycle holds.
2. Avoid unclear battlegrounds: steer clear of sectors where it is still unclear how severely AI may disrupt or render existing business models obsolete.
3. Focus on bottlenecks: prioritize areas of scarcity where limited supply supports pricing power and creates clearer earnings visibility.

In portfolio construction, we follow a clear three-part approach. We participate in technological #innovation through equities but deliberately maintain #breadth rather than focusing solely on AI in the narrow sense. At the same time, we enhance portfolio #stability through diversification across asset classes and regions. This approach allows investors to benefit from the structural upside potential while remaining resilient to potential shocks, which cannot be ruled out given the current geopolitical environment.