How to play the artificial intelligence theme in markets the Chris Wood way

That said, Chris Wood believes that the 'picks and shovels theme' for AI remains the most compelling story for now, which is why Nvidia remains his core holding despite valuation at 41x sales.

Artificial intelligence (AI) is on the foothills of the next bubble, believes Christopher Wood, global head of equity strategy at Jefferies. The six Big Tech stocks, defined as FAANGM (Alphabet, Amazon, Apple, Meta, Microsoft, and Netflix), he said, may not remain the dominant thematic for the next decade as they were for the last ten.

“There is no doubt that the pain trade is getting ever more painful for those equity investors still defensively positioned as confidence grows that AI provides the next productivity-enhancing growth narrative for the coming decade. It is also conveniently, giving continuing inflationary concerns, deflationary in nature. AI, so the thinking goes, is in the foothills of the next bubble,” Wood wrote in GREED & fear, his weekly newsletter to investors.

That said, he believes that the ‘picks and shovels theme’ for AI remains the most compelling story for now, which is why Nvidia remains his core holding despite its current valuation of 41x sales.

“It is no surprise to see the likes of AMD and Oracle rallying of late as investors look for theoretical catch-up plays on the AI theme," Wood wrote.

FAANGM as a percentage of S&P 500 market-cap is almost back at its September 2020 all-time high. The six stocks’ share of S&P 500 market cap has risen from a recent low of 18.3 per cent on 5 January to a recent high of 24.6 per cent on 1 June and is now 24.1 per cent, compared with the peak of 26.2 per cent reached on 1 September 2020.

At the bourses, AMD’s and Oracle’s stocks have rallied 42 per cent and 29 per cent respectively since the beginning of May, and are up 133 per cent and 101 per cent from their low reached in September / October 2022. By contrast, Nvidia is up 298 per cent since bottoming in October 2022.

The latest BofA Securities survey suggests that global fund managers “exclusively long” tech stocks with 55 per cent of the participants saying “Long Big Tech” is currently the most crowded trade. The survey also found that 40 per cent of the participants expect widespread adoption of AI in the next two years will drive corporate profits higher.

Meanwhile, a PWC report estimates that AI technology could generate $15.7 trillion of revenue by 2030 globally, boosting the gross domestic product (GDP) of local economies by up to 26 per cent. AI software, according to Precedence Research, could become a $1 trillion market in the same timeframe, up from $209 billion in 2022.

According to Accenture's estimates, AI’s impact would be most noticeable for the education (84 per cent) by 2035, followed by accommodation & food services (74 per cent), construction (71 per cent), wholesale & retail (59 per cent) and healthcare (55 per cent) industries, with the laggards being utilities (9 per cent) and information & communication (17 per cent).