A Stock Picker’s Look Beyond AI

Artificial intelligence (AI) and its unparalleled potential have powered stock market returns over the past year. Yet the market has more to offer, particularly as leadership may be poised to broaden beyond AI beneficiaries. Equity investor Carrie King shines a light into forgotten corners of the U.S. equity market to reveal what may be some underappreciated sources of return.

U.S. stock market returns and earnings growth have been powered by a small group of mega-cap standouts, with their leverage into artificial intelligence (AI) contributing heavily to the surge. But what are investors missing as indexes and mindshare are centered on the mega trend? Carrie King, U.S. and Developed Markets CIO for BlackRock Fundamental Equities, joined The Bid podcast to peer into some of the less visible corners of the stock market as AI has commanded the spotlight.

Prepare for ‘handoff’

While the leading mega-cap tech and internet stocks dubbed the “Magnificent 7” have driven stock market returns over the past 12 months, many also had experienced a big fundamental setback in 2022. So the AI-fueled rush in 2023 included a fair bit of reversion from the prior year. Year-over-year earnings comparisons were easy as a result, and the earnings growth for many large tech stocks may have seen their high bar now.

Going forward, Ms. King sees growth rates for these companies normalizing, leaving room for other parts of the market to catch up and providing for greater market breadth.

“This handoff reflects a tech-specific business cycle that has been out of sync with the rest of the market,” she says, explaining that technology soared as life went online during COVID, then declined after companies overspent and interest rates climbed, and resurged with rightsizing and the AI infusion in 2023.