Navigating the AI Revolution: 2025 AI Outlook

Key Takeaways

AI-related stocks led the market’s rally from 2022’s lows to repeated record highs in 2024. The outlook for 2025 is more nuanced, as the initial unbridled enthusiasm for AI-related stocks now faces uncertainty around the payoff from the massive investments companies are making in the technology.

Are the hundreds of billions spent on the technology justified?

This doubt explains the short, sharp sell-offs in AI-related stocks that we witnessed in the summer and again in October 2024. As investors, we understand the skepticism — not every stock with “AI” in the name will be a winner. Indeed, we’ve written about the challenges and hurdles to broad AI adoption. But we believe that AI is a profoundly powerful, transformative technology that we’ve barely begun to develop and deploy.

Moreover, we don’t think AI’s opportunities are limited to the stocks closely tied to the technology’s development and distribution. We believe it could potentially transform every aspect of the global economy.

AI Payoffs Already Evident in Some Sectors

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 from 6% to 12% by 2030. The global AI market will reach $1.6 trillion by then, 10 times greater than today.¹

Companies are already seeing a clear, positive impact from AI adoption. Facebook parent Meta Platforms has attributed strong revenue growth to its AI-enhanced ad targeting and content creation. Similarly, Amazon says AI has improved customer service and delivery times by making its supply and fulfillment processes more efficient.

Such gains aren’t just limited to the largest tech companies. Amazon competitor UPS reports improvements throughout its logistics and delivery operation thanks to AI tools. Banks are using the technology to enhance risk management and fraud prevention.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.

Leading the AI Revolution: Trailblazers and Their Impacts on the Tech Sector

AI could 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. The seemingly insatiable demand for its chips has seen Nvidia’s stock increase more than 10 times in value since the end of 2022.³ By comparison, shares of AMD, which many see as the No. 2 AI chip provider behind Nvidia, have more than doubled.⁴

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 depends on massive data sets, requiring ever-greater computing power and supporting data center businesses.

A knock-on effect of the AI revolution is surging demand for electricity and energy-efficient solutions. We believe each element in this AI architecture presents a tremendous opportunity for innovation and profit.

Another big area of potential disruption is whether and how ChatGPT-style generative AI tools will displace traditional search engines. Tech industry analyst Gartner famously said in early 2024 that generative AI chatbots such as ChatGPT would mean 25% lower search volumes by 2026.⁵ Indeed, on October 31, ChatGPT rolled out its search interface in a direct challenge to search leader Google.

But the reality will likely be more complicated. AI already powers Google’s search engine, offering prominent “AI Overviews” or summaries at the top of its search results. While user surveys show increasing adoption of generative AI searches on the margin, the reality is that Google parent Alphabet has reported strong revenue growth from its search business in the roughly two years since ChatGPT’s public unveiling.⁶

Alphabet 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.

Similarly, Microsoft sits at the intersection of several 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.

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 extensively incorporated generative AI-enhanced processes and features.

Meanwhile, software development has benefited as existing AI tools generate, debug and suggest code improvements in many languages. For example, in its third-quarter 2024 earnings call, Alphabet executives estimated that 25% of all new code at their firm is AI-generated.

AI has vast potential to transform providers’ and customers' businesses. Of course, it's not guaranteed that these early beneficiaries of the technology will continue to win 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 AI adoption could see a 122% boost to their cash flows while firms slow to adopt AI could see 23%-cash flow declines due to procrastination.⁷

Health care offers a microcosm of AI’s potential widespread impact 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, accounting for up to 35% of all health care costs.⁸

• 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.⁹

• 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.¹⁰ 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 CEO 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.¹¹

Elsewhere, retail systems can collaborate with AI to improve consumer experiences, forecasting and inventory management. Automating fleets, vehicles, and transportation schedules should improve the efficiency of 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 2024, the number of AI-generated digital news sites increased sevenfold to 347.¹² 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 are also facing the wave of AI automation. Most jobs such agencies help fill — from clerical roles to cashiers — will likely be 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.¹³

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.¹⁴ The company lost nearly 85% of its market value year to date through late November 2024. Chegg recently announced a partnership with OpenAI to upgrade its product offerings and regain lost ground.

Harnessing AI’s Transformative Power: Insights and Investment Strategies

Organizations seem intent on trying to catch the AI wave. Overall, global corporate investment in AI is expected to exceed $240 billion by 2024, up from around $22 billion a decade earlier.¹⁵ Similarly, U.S. government spending on AI research and development has tripled in the past five years to $1.8 billion.¹⁶

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, a $2 trillion impact on retailers and a $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 AI’s massive transformative potential 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.