AI investing trends, opportunities, and stocks to watch

Key Concepts

• AI Evolution: The shift from focusing solely on AI hardware (chips) to the development and deployment of AI software, networking, and applications.
• Capex Cycle: Continued investment in capital expenditures related to AI infrastructure, including data centers and energy.
• Relative Value Strategies (Fixed Income): Focusing on the difference in value between similar fixed income investments rather than predicting interest rate movements.
• AI Washing: Companies falsely claiming to be AI-driven without substantial integration of AI into their core business.
• Compute Constrained: A situation where demand for computing power exceeds available supply, driving innovation and cost reduction.
• Software Multiplier: The potential for significant enterprise value creation linked to the current AI infrastructure buildout (estimated 9x multiplier).
• International Diversification: The strategy of investing in international markets to preserve and grow wealth, capitalizing on valuation gaps.

AI Trade Outlook & Investment Strategies

The discussion centers on the evolving landscape of the AI trade, moving beyond the initial hardware boom to a phase driven by software and infrastructure. David Stubs argues against “AI fatigue,” framing it as an “AI evolution” with two key pathways for continued growth: the ongoing capital expenditure (capex) cycle and the market rewarding firms successfully deploying AI to improve margins. He highlights the continued tightness in data center and energy markets as indicators of sustained capex demand for the next 2-3 years. He points to the financial sector as a prime candidate for AI-driven margin improvement due to its proprietary data and automated processes.

Byron Deeter emphasizes a shift towards AI software, specifically networking and the software stack that amplifies infrastructure buildouts, and the platforms/applications unlocked by this infrastructure. He notes Nvidia’s strength lies in its end-to-end approach (silicon, software, networking) and anticipates increased competition from AMD, Broadcom, and hyperscalers. He estimates a potential $45 trillion software market cap linked to the current $550 billion (soon to be $1 trillion) capex cycle.

Picking Winners and Losers in the AI Space

David Stubs suggests identifying companies with a low revenue per employee as a potential indicator of future growth without significant headcount increases. He also advocates for investment in the energy sector, despite its relatively small weighting (2.9% of S&P market cap) and the need for specialized knowledge to navigate it. He recommends exploring private infrastructure funds and data center plays.

Byron Deeter advises investors to differentiate between genuine AI integration and “AI washing,” emphasizing the importance of due diligence into supply chains and customer pull-through. He believes traditional SaaS companies are oversold but not obsolete, and that the market will reward those truly embracing AI.

International Investment Opportunities

David Stubs stresses the importance of international diversification for wealth preservation and growth, citing valuation gaps in international markets compared to the US. He highlights Japan and Europe as compelling opportunities, pointing to structural reforms in Japan and the evolving strength of European banks. He suggests exploring private equity, private credit, and infrastructure investments in these regions, particularly in areas less competitive than the US. He acknowledges the continued strength of US markets but cautions against solely US-focused portfolios, considering the high dollar value and attractive international themes.

Fixed Income Strategies

David Stubs recommends focusing on relative value strategies in fixed income, avoiding excessive interest rate risk given the uncertain Fed policy. He notes that lower rates at the front end don't necessarily translate to lower rates at the long end. He emphasizes the importance of fixed income’s role in portfolio protection during equity market downturns and highlights the potential for alpha generation in active fixed income management.

The IPO Market & M&A Activity

Byron Deeter expresses cautious optimism about the IPO market, noting a 35% increase in IPOs in 2025 but emphasizing that it’s a recovery from historically low levels. He anticipates a potentially strong IPO year in 2027, but believes 2026 will be a transitional period. He is more bullish on M&A activity, predicting that public companies will increasingly acquire AI-focused businesses to address competitive pressures.

Defining and Assessing an AI Bubble

Byron Deeter addresses the debate surrounding an AI bubble. He argues that current demand for AI compute is strong and that falling prices and increasing capabilities are unlocking new use cases, suggesting the market is still in the early innings. While acknowledging high valuations and potential for losses, he emphasizes the transformative potential of AI in areas like healthcare, education, and robotics. He defines a bubble not just by multiples but by the underlying demand and innovation. He believes that while some companies will fail, the overall value creation potential outweighs the risks.

Nvidia’s Position and Future Competition

Byron Deeter expresses respect for Nvidia’s leadership but anticipates increasing competition from AMD, Broadcom, and hyperscalers, particularly as they develop their own software and networking capabilities. He believes this competition will benefit the market by increasing offerings and balancing the demand equation.

Notable Quotes

• David Stubs: “I think it's AI evolution rather than fatigue.”
• Byron Deeter: “We’re entering this next phase of the AI transformation and therefore the AI trades and that is all about AI software.”
• Byron Deeter: “Separate [companies] from the companies that are really embracing and leading in this next wave.”
• Byron Deeter: “We’re still in the early innings.”

Logical Connections

The conversation flows logically from a broad overview of the AI trade to specific investment strategies. The discussion of AI evolution naturally leads to identifying winners and losers, which then branches into international opportunities and fixed income considerations. The IPO market and M&A activity are discussed as potential outcomes of the evolving AI landscape, culminating in an assessment of the “bubble” risk and Nvidia’s future position.

Data & Statistics

• Energy Sector Weighting in S&P 500: 2.9%
• High Yield Market Exposure to Energy: 11%
• Current AI Capex: $550 billion annual run rate
• Projected AI Capex: Approaching $1 trillion
• Software Multiplier: 9x enterprise value linked to AI capex
• Potential Software Market Cap: $45 trillion
• 2025 IPOs: 202 companies (35% increase from prior year)

Conclusion

The discussion paints a picture of an AI landscape transitioning from hardware to software, presenting both opportunities and challenges for investors. Successful navigation of this evolution requires a focus on companies genuinely integrating AI, a willingness to explore international markets, and a nuanced approach to fixed income. While acknowledging the potential for volatility and the risk of an AI bubble, the overall sentiment is optimistic, emphasizing the transformative potential of AI and the long-term growth opportunities it presents. The key takeaway is that the AI trade is not over, but it is evolving, demanding a more sophisticated and discerning investment strategy.