The increasing prevalence of artificial intelligence (AI) across a wide array of industries has spurred significant investment in the sector over the last two years as the world’s largest tech firms jump in. As AI continues to evolve, many investors are wondering if 2025 will be a pivotal year when these investments begin to show significant returns.
From its impact on stock market valuations to its transformative potential across industries, here the Investing News Network delves into the key trends and developments that are shaping the future of AI.
Essentially, the US stock market is priced for perfection, leaving it susceptible to a correction triggered by rising interest rates, disappointing earnings or a broader economic slowdown.
Further, the expectation of continued profit margin expansion and earnings growth fueled by ongoing AI innovation supports the notion of further upside potential for tech stocks.
Rather than focusing on reasons for its overvaluation and bearish indicators, he aims to understand the underlying factors driving the market’s behavior over the past two years.
“The market is telling us that we are in a ‘Model Shift’ when it comes to future growth and profits,” he explained. “Traditional valuation methods, like price-to-earnings ratios, are backward-looking and may not be suitable in this environment. Investors are focused on long-term potential, particularly in areas like AI, and are willing to pay a premium for it. The current surge in AI might resemble the dot-com bubble, but it could take years to confirm.”
He added that interest rate cuts from the US Federal Reserve would support higher valuations.
BNY also points to historical data showing that an environment of easing monetary policy tends to coincide with economic growth, with an average of 16.5 percent growth in the year following initial rate cuts since 1984. It suggests that S&P 500 earnings growth will be between 10 to 15 percent in 2025, with the index reaching around 6,600 in 2025. Although this represents slower growth compared to 2024, it still indicates continued expansion.
While Rosenberg is mindful of near-term risks, such as weakness in the US labor market and the likelihood of profit-taking and early rebalancing, he emphasized the importance of keeping an open mind in 2025.
In his view, it’s key for investors to learn from the mistakes of the past year, such as overreacting to short-term volatility and underestimating the potential of transformative technologies.
While Big Tech pours billions into AI development, the question of profitability in 2025 hangs in the balance.
Regardless of the exact timeline or nature of AGI’s arrival, one thing is certain: the race to develop and deploy advanced AI is driving an insatiable demand for powerful hardware, and key companies are stepping up.
For its part, Goldman Sachs predicts that investor focus will now shift from AI infrastructure to a wider “Phase 3” of AI application deployment and monetization. Companies of interest include software and services firms.
Companies like NVIDIA, Meta and Microsoft are pursuing a monopoly strategy, aiming to capture a large market share and maximize value extraction from a broad user base. Challenges include competition and pressure to keep prices low.
The outlook for the tech sector and the broader stock market in 2025 is cautiously optimistic.
AI is expected to continue playing a pivotal role, with the race for AI dominance fueling investments in infrastructure and innovation, and positioning key hardware and software players for potential gains.
However, the profitability of AI investments remains to be seen. Companies’ ability to adapt and capitalize on emerging opportunities will be crucial for sustained success in the dynamic landscape of 2025.
Securities Disclosure: I, Meagen Seatter, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Syntheia and Zero Candida Technologies are clients of the Investing News Network. This article is not paid-for content.
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