BlackRock Gets (Cautiously) Bullish on AI

“We implement an overweight to AI as a mega force,” the BlackRock Investment Institute said in its midyear outlook report.

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Illustration by II

While inflation persists and higher interest rates remain, the BlackRock Investment Institute says that it’s pivoting to different investment opportunities and focusing on three “mega trends,” including — what else? — artificial intelligence.

“Developed market equities remain the biggest building block by far in our portfolios, especially U.S. stocks, even as we slightly underweight them. We implement an overweight to AI as a mega force. Our tilt toward quality already captures AI beneficiaries,” the institute said in its widely read midyear outlook, published Wednesday.

That’s hardly a novel declaration. AI has drawn the attention of investors since the launch of OpenAI’s ChatGPT in November last year, which made an AI tool that explains and creates things more accessible than ever before.

Since then, asset managers have tested AI to see if it can boost returns and win mandates from institutional investors. The Bloomberg Terminal has already received its own ChatGPT-style AI upgrade. Venture capitalists are flocking to AI startups, wooed by its impact and return potential.

But BlackRock isn’t blindly bullish. Strategists at the world’s largest asset manager have already observed that various publicly traded companies are performing differently in 2023, and they’re taking a more sober approach to AI than others may be.

Stocks have rebounded this year — the S&P 500 index is up 14 percent and the Nasdaq Composite index is up 31 percent — and technology companies have led the way. But those gains “mask a sharp divergence in performance, with many stocks lagging the broader index,” BlackRock said, adding that “getting granular in portfolios in the new regime is likely to be more important than relying on broad asset class returns.”

That means finding parts of the market where the macro outlook is better reflected in stock prices, and then, in the case of technology and AI, “seeking opportunities to harness mega forces that not only shape the macro outlook but are set to empower and disrupt sectors and companies across the globe, too.”

According to BlackRock, the markets are still trying to figure out how extensively AI could disrupt industries — at this juncture, it’s too soon to tell. But the advancement and adoption of technology has almost always accelerated over time. BlackRock pointed out that in 1900, few people in the U.S. had electricity, but by 1960, it was ubiquitous. Almost no one had a personal cell phone in the early 1980s, but almost everyone did 20 years later.

Much as processes and machines replaced blue-collar jobs in the past, AI could do the same to white-collar jobs, BlackRock said. The cost savings could boost profit margins, as companies with high staffing costs or a large share of tasks automate operations and reap the benefits. Or, of course, some jobs could be eliminated entirely.

AI computing also requires better chips — which could mean a boon for some semiconductor manufacturers — and it needs data as its “fuel.” Both could be good places for investment dollars, according to the institute.

“We think the importance of data for AI and potential winners is underappreciated. Companies with vast sets of proprietary data have the ability to more quickly and easily leverage a large amount of data to create innovative models. New AI tools could analyze and unlock the value of the data gold mine some companies may be sitting on,” BlackRock said.

BlackRock’s strategists caution that a lot of thought must go into investing in so-called “mega forces,” which can transcend sectors and regions and fit easily into traditional portfolio building blocks. But such a move could be rewarding, and those returns could come when investors need them most.

“We think this unusual equity market shows [that] a mega force like AI can be a big driver of returns, even when the macro environment is not your friend,” the report said.

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