Navigating the AI Revolution: Pioneers, Progress and Investing Insights
Artificial intelligence is reshaping the investment landscape, elevating particular sectors, industries and firms, while others face the challenge of adapting to this transformative era.
The transformative nature of artificial intelligence is contributing to outsized benefits for select companies and their investors.
Tech companies top the list of firms whose stock prices have traditionally benefited from AI, but we expect profound impacts across most economic sectors.
Identifying the leaders and laggards in the evolving AI space requires active portfolio management and sound investment analysis.
When it took the world by storm in late 2022, ChatGPT heralded an onslaught of attention to artificial intelligence’s (AI’s) vast possibilities.
Since then, the strong demand for AI-related technology stocks largely drove the surge in U.S. stocks during the first half of 2023 — a rally amid rising interest rates, fears of recession and large-scale bank failures. Five stocks — Apple, Microsoft, Nvidia, Amazon and Meta — constituted two-thirds of the S&P 500® Index’s first-half return.1
These markedly different companies highlight the diverse ways firms can deploy AI. They also illustrate the required nuance for assessing this technology’s impacts from company to company.
As investors, we don’t think AI’s opportunities are limited to the stocks most closely tied to the technology’s development and distribution. We believe it can potentially transform every aspect of the global economy.
Research suggests that firms willing to incorporate AI into their operations and products quickly may benefit the most. PwC estimates that AI will boost the output of every sector of the economy by 6%-12% by 2030. By then, the global AI market is expected to reach $1.6 trillion, 10 times greater than today.2
But the investment benefits of this transformation probably won’t accrue equally. Some sectors, industries and companies will execute better or see opportunities more clearly than others. At the same time, AI will present certain businesses with mounting competitive and operational challenges.
Assessing the evolution's prospective AI industry leaders and innovators marks a relatively new imperative for investors. Here’s a look at companies that we think might lead or fall behind as AI increasingly shapes the global economy.
Leading the AI Revolution: Trailblazers and Their Impacts on the Tech Sector
AI can potentially transform the technology sector, from software development and search capabilities to computing power and security.
For example, semiconductor firms like Nvidia and Advanced Micro Devices (AMD) represent the pickaxes and shovels in the metaphorical AI gold rush. They’re crucial in providing the chip fuel necessary to power AI engines. Shares of Nvidia, responding to strong revenue growth forecasts, almost tripled in the first half of the year, while shares of AMD almost doubled.3
The cost, complexity and massive computational power required to develop and deploy AI technology suggest that many companies will opt for an “AI cloud” solution. As a result, we believe AI will likely accelerate the adoption and growth of cloud computing services. Similarly, AI generates and depends on massive data sets, supporting data center businesses.
It’s unclear if ChatGPT-style generative AI tools will displace traditional search methods or act as enhancements to improve existing search engines. In terms of security, AI will increase the threat of cyberattacks by making new, sophisticated tools available to bad actors. On the other hand, AI could revolutionize threat detection and neutralize sophisticated cyberattacks.
Other technology platforms will also inevitably employ AI. It could streamline operations and boost performance for firms offering online services such as travel reservations and ticket brokers. Expedia, for instance, has already rolled out a new ChatGPT feature in its app.
Meanwhile, software development has benefited as existing AI tools generate, debug, and suggest code improvements in many languages.
Microsoft sits at the intersection of a number of these trends. It’s a prominent financial backer of Open AI, which developed ChatGPT. Its GitHub Copilot program targets software development, and users can now access Open AI tools via Microsoft’s Azure cloud computing capabilities. The tech giant has also incorporated ChatGPT into its Microsoft Bing search engine.
Similarly, Alphabet (Google’s parent company) has used AI internally for years in its software development across many applications. It’s deploying AI to enhance search functions and offers AI tools through its cloud business and development tools through Google Bard.
AI has vast potential along many dimensions to transform business for providers and customers. Of course, there's no guarantee that these early beneficiaries of the technology will keep winning over time.
Diverse Investment Opportunities in AI Beyond Tech
We believe the ubiquitous nature of AI’s likely impact across sectors and industries foretells broad investment opportunities beyond information technology.
Consulting giant McKinsey estimates that firms at the leading edge of adopting AI could see a 122% boost to their cash flow. On the other hand, firms slow in adopting it could see a 23% decline in cash flow based solely on their procrastination.4
Health care offers a microcosm of the potential widespread impact of AI across a given sector:
Medical devices: Radiology devices may soon be able to diagnose images automatically. AI-enabled robots can assist with surgery.
Health care administration: AI automation could help integrate systems, cut costs, and save time in this area, which currently accounts for up to 35% of all health care costs.5
Biopharma: AI speeds clinical trials, aids understanding of molecular biology, and can cut drug discovery time by up to 70%. A Boston Consulting Group analysis found that as of March 2022, “biotech companies using an AI-first approach had more than 150 small-molecule drugs in discovery and more than 15 already in clinical trials.6
Diagnosis and evaluation: Cleerly, a new startup company using AI, rivals coronary angiographies in its ability to scan the heart. Research shows it can predict heart attacks with an 84% accuracy rate.7 Meanwhile, Absci Corp., a small-cap firm, uses generative AI to develop antibody-based drugs to treat various diseases.
Similar changes promise to alter other areas of the economy.
In finance, AI-powered robo-advisors may soon help guide investors while automating some trading functions. Generative AI can also help analysts decipher the tone of CEOs’ comments or whether headlines may support or hurt a particular stock. Consulting firm Gartner predicts that 75% of venture capital and early-stage investor reviews will use AI-related data analytics within two years.
In advertising and media, AI can help journalists and marketers research, create and synthesize content and segment target audiences. This year, 58% of enterprise marketers plan to use AI for search engine optimization (SEO) and content creation.8
Elsewhere, retail systems can collaborate with AI to improve consumer experiences, forecasting and inventory management. Automating fleets, vehicles and schedules in transportation should improve efficiency for shippers and commuters. AI-powered robots can assess soil health and crop quality in agriculture while suggesting fertilizer applications.
AI Progress Presents Business Challenges and Changes
In our view, AI’s benefits won’t be distributed equally across the investment landscape. Moreover, some businesses and industries will likely find it challenging to function in an AI world.
Traditional publishers and producers of movies, books, magazines and news worry about getting caught in the crosshairs of AI-produced content. Many already have: Between May 1 and mid-July, the number of AI-generated digital news sites increased seven-fold to 347.9 At the same time, the Hollywood writers’ and actors’ strikes highlight a crucial front in the war against AI’s impact on creative content because writers and actors fear displacement by AI — or being relegated to fixing its errors.
Such AI content could hurt sales and customer traffic for original content producers. That’s partly because AI chatbot searches for readers seeking specific content currently generate fewer results than traditional search engines.
Business process outsourcers, employment service agencies and temporary job providers also face AI’s automation wave. Most jobs that such agencies help fill — from clerical roles to cashiers — have a high probability of being replaced by AI. Today, more than 4.5 million workers fill retail sales positions. They are the most common jobs in the U.S., and more than 90% of them could one day be fully automated.10
Online tutorial services have already faced decreased demand as students turn to ChatGPT. Direct-to-student platform Chegg asserts that ChatGPT has eroded its customer growth rate.11 The company has lost two-thirds of its market value this year. In a sign of the times, Chegg recently announced a partnership with OpenAI to upgrade its product offerings to regain lost ground.
Meanwhile, AI has already shifted power within the tech sector. For instance, Micron Technology has long dominated the market for low-price memory chips. But fewer applications will need these chips as AI proliferates, so analysts have slashed Micron’s growth forecasts.12
Harnessing AI’s Transformative Power: Insights on the Economic Impact and Investment Strategies
Organizations seem intent on trying to catch the AI wave. Overall, global corporate investment in AI surged to $276 billion in 2021, up from just $15 billion eight years earlier. Similarly, U.S. government spending on AI research and development has tripled in the past five years to $1.8 billion.13
As AI inevitably makes its way into the operations of most businesses, its financial effects will multiply. Accenture forecasts that by 2035, AI will have a $3.8 trillion impact on the manufacturing sector, $2 trillion impact on retailers and $461 billion impact on health care.
Some sectors, industries and businesses will enjoy AI’s positive impacts more than others, while certain portions of the economy may struggle to adapt.
Tapping the massive transformative potential of AI will require sound investment selection. We believe our active portfolio management and fundamental investment research position us well to differentiate between the companies leading AI’s economic transformation and those trailing it.
Jack Pitcher, “A Majority of S&P 500 Stocks Are Up This Year as Market Breadth Improves,” Wall Street Journal, June 29, 2023.
Precedence Research, “Artificial Intelligence Market – Global Industry Analysis, Size, Share, Growth, Trends, Regional Outlook, and Forecast 2023-2032.”
Mike Butler, “The AI Battle Roars On,” Tastylive, July 28, 2023; Chavi Mehta and Stephen Nellis, “Nvidia shares soar nearly 30% as sales forecast jumps and AI booms,” Reuters, May 24, 2023; Emily Bary, “Nividia could follow ‘blowout’ outlook with more massive upside, analyst says,” MarketWatch, July 12, 2023.
Jacques Bughin, Jeongmin Seong, and James Manyika, et al., “Notes from the AI Frontier: Modeling the Impact of AI on the World Economy,” McKinsey Global Institute, September 4, 2018.
Grand View Research, Artificial Intelligence Market Size, Share & Trends Analysis Report by Solution, by Technology (Deep Learning, Machine Learning), by End-use, by Region, and Segment Forecasts, 2023 – 2030.
Margaret Ayers, Madura Jayatunga, and John Goldader, et al., “Adopting AI in Drug Discovery,” Boston Consulting Group, March 29, 2022.
Matthew Wilson, “New AI Could Help Predict and Prevent Heart Attacks,” Nice News, August 24, 2023.
Laurie Sullivan, “Fifty-eight Percent of Enterprise Marketers Plan to Use AI for SEO, Study Finds,” MediaPost, March 2, 2023.
Joe Mandese, “NewsGuard Launches ‘Made-for-Advertising’ Service in Response to ANA Study,’ MediaPost, July 19, 2023.
U.S. Bureau of Labor Statistics; Carl B. Frey and Michael A. Osborne, “The Future of Employment: How Susceptible Are Jobs to Computerization?” Technological Forecasting and Social Change 114 (January 2017): 254-280; Jeff Desjardins, “Visualizing the Jobs Lost to Automation,” Visual Capitalist, May 30, 2017.
Baystreet Capital, “Chegg Wanes as Outside Forces Said to Be Hurting Growth,” Investing Channel, May 2, 2023.
Thomas Yeung, “AI Stocks: The ACTUAL Winners and Losers from the AI Revolution,” Investor Place, February 17, 2023.
Shana Lynch, “2023 State of AI in 14 Charts,” Stanford University Human-Centered Artificial Intelligence, April 3, 2023.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.