AI rally ‘far from over’, UBS says as it forecasts bigger tech gains in 2025

Billions of dollars of investment in artificial intelligence will propel tech stocks to another year of extraordinary gains, according to analysts at UBS.

UBS wrote in a note on Friday that while “easy gains in AI may well be behind us,” the rally “appears far from over.”

The investment bank also recommends the world’s largest technology companies make progress in converting capital expenditure into profitability this year.

The rise of AI helped the world’s biggest tech outperform the broader market during a 2024 characterized by macroeconomic uncertainty and geopolitical turmoil.

The US technology index, the Nasdaq, added around 33 percent in 2024, with companies such as Apple, Amazon and Tesla rising between 30 and 70 percent each, and chipmaker Nvidia an incredible 190 percent.

The so-called Magnificent Seven tech giants were responsible for more than half of the S&P 500’s gains in 2024.

By contrast, the tech-light FTSE 100 added just 5.7 percent, while the Eurostoxx 600 index rose 6.4 percent.

UBS wrote: “While easy gains in AI may be behind us, we think this rally appears far from over.”

The bank believes AI-related capital spending by the four largest tech companies (Amazon, Apple, Alphabet and Meta) will continue to drive profits in the near term, as spending grew 51 percent year-on-year to $224 billion. of dollars last year.

UBS forecasts year-on-year growth of 25 percent in 2025, reaching $280 billion.

The bank also predicts that big tech companies will “make further progress in monetizing their AI spending this year.”

It said: “We anticipate the gap between AI capital spending and revenue will narrow in 2025.

“Companies that adopt AI will use it to increase their revenue and reduce their costs, which speaks to the usefulness of the economic value added of AI as a key metric for monetization.”

UBS added that AI valuations are “not as overblown as you might think,” despite two years of bumper earnings, thanks to earnings growth.

It said: “We remain optimistic on the AI ​​theme and maintain our positive view on AI semiconductors and major cloud platforms.”

“We remain constructive on quality large-cap AI names in particular, with strong seasonality in the first quarter being another near-term factor.”

Where is the ‘AI revolution’ going next?

In a separate note published this week, Wedbush analysts considered where market interest might fall in the third year of the “AI revolution.”

Nvidia and Jensen led the initial charge as their chips became the picks and shovels of the emerging AI gold rush.

So-called cloud/hyperscale players followed, Wedbush said, with “Microsoft and now…Google (GCP) and Amazon (AWS) finding big momentum in cloud and AI.”

Now the broker believes it’s time for the broader software space to “join the AI ​​party”, amid an “explosive” number of use cases emerging.

“The era of AI software is here,” Wedbush said, and “key players will benefit from this once-in-a-generation fourth industrial revolution.”

The broker has called big data analytics provider Palantir and customer relationship management (CRM) platform Salesforce “the two best software in the AI ​​revolution through 2025.”

Palantir Technologies was the S&P 500’s best performer in 2024, adding about 370 percent, as the group racked up both customer orders and shareholder interest with its artificial intelligence platform.

Wedbush said: ‘Palantir has been a major focus during the AI ​​revolution with expanding use cases for its flagship products that have led to a larger partner ecosystem with rapidly increasing demand across the generative AI landscape. Enterprise scale and enterprise ready.

“This will be a major growth driver for the US commercial business over the next 12 to 18 months as more companies take the AI ​​path with Palantir.”

Salesforce added a modest 30 percent last year, but Wedbush believes the group is in first position by 2025.

The broker said: ‘With the AI ​​revolution entering the software phase heading into 2025, (Salesforce) is well positioned to capture its fair share of the market expansion as the AI ​​monetization phase will catalyze ( its) growth over the next 12 to 18 months. with a $7 trillion digital labor market opportunity on the horizon.

“We think (Salesforce) is a clear second beneficiary from the AI ​​revolution that could add ~$80 per share… as this monetization story takes shape over the next 12-18 months.”