The artificial intelligence investment theme made the “Magnificent Seven”—but could soon begin to disrupt it.

We are one year into the generative artificial intelligence (AI) investment theme.

This first wave of the AI theme has been extraordinary in several ways. But when we look back many years from now, the most noteworthy thing may be how it was both amazingly concentrated and oddly undiscerning.

We think the second wave of the theme is likely to disrupt all of that. AI is about more than Nvidia. And it’s not just about the tech sector, either. Indeed, we think the stock prices of some mega-cap technology companies have surfed the AI bull market with questionable justification, and are not as well positioned to fully catch the second wave.

The good news for investors is that the outlines of this second wave are becoming visible, and they should be able to participate with more than a handful of stocks in a couple of sectors.

Killer App

The concentration of the AI investment theme is a well-worn story. The “Magnificent Seven” stocks—Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla—were up 77% in 2023 when the rest of the S&P 500 Index was up 14%.

The lack of discernment has received less commentary, but is starting to get investors’ attention.

Microsoft has an all-important partnership with OpenAI, creator of ChatGPT, the theme’s current killer app. By contrast, Alphabet launched Bard, which committed some embarrassing errors in its own promotional video. More recently, some of the output from its Gemini image-generating tool earned the company further ridicule and a couple of bruising rounds in the culture wars. For its part, Apple responded to competitors’ AI-enhanced search engines, app assistants and music playlists with some underwhelming improvements to its operating system’s auto-correct function. To us, current catch-up efforts look like exactly that—catch up.

Enterprise Spending

As some of the mega-cap tech companies begin to struggle with the AI investment theme, many other non-technology companies are starting to adapt and integrate AI into their strategic planning and enterprise spending. We believe many of those could be among the main beneficiaries of the second wave of the theme.

How wide is that range of companies? Potentially as wide as the range that currently use email and the internet.

In banking, a company like American Express, with its growing reputation as a mainstream FinTech leader and its AmEx Digital Labs innovation division, has been busy acquiring AI startups and integrating AI into several areas of its business, from credit card customer services and reward programs to travel-booking recommendations.

An industrial firm like John Deere, more associated with farm machines than machine learning, has long been investing and making acquisitions to develop intelligent crop-spraying robots and autonomously navigating tractors. It created a stir at the Las Vegas Consumer Electronics Show a year ago, when it unveiled a fully autonomous version of its ubiquitous 8R tractor.

In pharmaceuticals, Eli Lilly CEO David Ricks has spoken about how text-generative AI tools can help create the reams of technical documents necessary for the regulatory process, while more specialized AI models trained on research data can contribute to drug discovery by overcoming human chemists’ behavioral and knowledge biases. Eli Lilly entered a partnership with pharma-tech company XtalPi last year to pursue that ambition.


It is important to note that marginal spending on AI tends to mean less spending elsewhere, and now the cost of capital is higher than it was three years ago. Consultants like Accenture may be booking record AI-related sales, but the company also reported a slowdown in clients’ general spending.

Given that AI is a technology spend, we think it’s a fair assumption that much of it will cannibalize existing tech budgets. That brings us back to the potential challenges that AI poses to some mega-cap technology companies.

We think recent revenue trends suggest that cloud computing could be the main casualty, at least in the near term. That underlines why it is so important for Alphabet to overcome its AI misfires and offer something to offset weaker Google Cloud revenues, and why a firm like Oracle is trying so hard to pivot from cloud to AI.

Because cloud computing has been a such big trend over recent years—in enterprise spend and in tech-sector earnings and stock prices—a reversal could result in a substantial change in the dispersion of market performance.

From ‘Magnificent Seven’ to ‘Dynamic Dozens’

In our view, this is how the second wave of the AI investment theme is likely to play out: The beneficiaries will be identified more broadly and with greater discernment.

We believe the “Magnificent Seven” is likely to become the “Magnificent Two or Three” as the truly big tech-sector winners of the trend consolidate their positions and the also-rans get down-rated. At the same time, look out for “Dynamic Dozens”: Companies emerging from tech and other sectors that pull ahead in integrating AI efficiencies into their strategic operations.

In our view, this could be a notable active-management opportunity, and identifying the potential winners and losers starts now.

In Case You Missed It

  • Eurozone Producer Price Index: -8.6% year-over-year in January
  • ISM Services Index: -0.8 to 52.6 in February
  • European Central Bank Policy Meeting: The ECB made no changes to its policy stance
  • Eurozone Q4 GDP (Final): +0.0% quarter-over-quarter
  • U.S. Employment Report: Nonfarm payrolls increased 275k and the unemployment rate increased to 3.9% in February

What to Watch For

  • Tuesday, March 12:
    • U.S. Consumer Price Index
  • Thursday, March 14:
    • U.S. Producer Price Index
    • U.S. Retail Sales
  • Friday, March 15:
    • University of Michigan Consumer Sentiment

    Investment Strategy Team