US stock market is direct beneficiary of AI boom

Over the past decade, the dominance of the US stock markets has been abundantly clear. Will the spread of artificial intelligence (AI) bring back similar growth rates? Christian Schmitt sees the basis for the pioneering position given by the size of the US domestic market and the economic structure.

The outperformance of the US equity market over the past decade has been impressive, with the S&P 500 up around 290 % since 2010. By comparison, the STOXX Europe 600, which has risen by around 80 % over the same period, looks modest. "Although the US equity market tends to be more highly valued, multiple expansion plays only a minor role in explaining the outperformance," says Schmitt. "The reasons are more fundamental: the sales and earnings performance of companies in the S&P 500 has been steep, while the fundamental performance of companies in the STOXX Europe 600 has been flat over the past decade.“

Growth from the spread of artificial intelligence

To answer the question of whether the AI boom will bring back such growth rates and who the beneficiaries will be, the ETHENEA Portfolio Manager classifies companies with direct exposure into three groups: First, manufacturers of semiconductors and related devices, for example Nvidia. Second, hyperscalers that provide the cloud computing infrastructure, including Alphabet. And third, technology companies that use AI technology to improve their products and services, such as Salesforce. "The largest and most significant companies from these three groups are based in the US," Schmitt notes. "The immediate impact of the AI boom - which so far is more fantasy than reality - has already been reflected in the share prices of these various companies, so the US stock market is the short-term beneficiary."

The portfolio manager expects the broader, longer-term benefits of AI adoption to accrue to those companies that use AI to increase productivity. "Companies with many knowledge workers and high administrative workloads - regardless of geographic location - will benefit the most." However, he admits: "As is usually the case with new technologies, it is the larger and more innovative companies within this group that stand to gain the most - and these are mainly to be found in the US.

The US has the right characteristics for innovation, efficiency and growth

The fact that entrepreneurial size and innovation are concentrated in the US is no coincidence: "The better fundamental performance of the US is generally due to a larger domestic market and a higher degree of capitalism, which promotes innovation and risk-taking, which in turn leads to more efficiency and growth," says Schmitt. "Today's largest and most successful companies have emerged from this environment. The sector composition of the world's leading companies is another factor explaining the US outperformance over the past decade: the IT sector, with its historically strong growth rates, high profitability and scalable business models, accounts for 25 % of the S&P 500, compared with just 5 % of the STOXX Europe 600.

Schmitt believes that these characteristics are unlikely to change significantly: "In the long term, the most attractive companies will therefore continue to be found in the US." However, he concedes: "The high concentration in the S&P 500, where five rather monothematic names account for almost a fifth of the market capitalisation, carries its own risks."