Tech and AI will continue to dominate in 2025

Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — which are among the biggest 10 companies on the S&P 500 — have accounted for about half the index’s gains in the year to October.

The ‘Mag 7’ as they are now known, comprise approximately 34 per cent of the index weighting — the most concentrated it has been in at least 40 years.

The impact can even be seen at a global level — the seven accounted for 12 per cent of both market value and profit for the MSCI World index, which contains 1,409 stocks.

But is it likely to continue or will these stocks, which have taken the stairs up over the past couple of decades, suddenly get the elevator down and bring everyone down with them?

No sharp shocks expected

According to Daniel Casali, chief investment strategist at Evelyn Partners, there is still plenty of demand momentum behind the AI theme going into 2025.

For instance Goldman Sachs forecasts the combined AI investment from Microsoft, Meta, Google, Amazon and Oracle will grow by a healthy 22 per cent in 2025, albeit down from more than 50 per cent in 2024.

Casali says: “The AI theme is also broadening out from AI tools (infrastructure investment) to AI users (software expansion) and creates another area of demand.”

Even if the Mag 7 suffer a major sell-off, and the wider market is impacted, this will have little impact on the real economy.

Gene Salerno, SG Kleinwort Hambros

While earnings growth is set to normalise to the high teens in 2025 and 2026, after burgeoning following the release of ChatGPT in November 2022, Casali does not feel the companies are going to disappoint investors.

He explains: “It is easy to make a case that the AI is overblown based on elevated valuations and especially considering the large sums of money being allocated to this theme.”

But JPMorgan Asset Management has estimated that AI spending (infrastructure and software) could total more than $1tn in the next year.

According to Casali: “To put that in context, AI spending is now growing faster than the entire US defence budget from virtually nothing five years ago.

“Such a rapid increase raises the risk of capital misallocation. Investors are probably likely to take a closer look at valuations, earnings delivery and productivity gains to determine whether the AI theme is overblown.”

Correlation conundrum

But given how much of the S&P 500 the seven take up, is there a risk from high correlation? Could a shift away from the AI theme put material downward pressure on the overall market from high valuations?