The threat to software-backed businesses from artificial intelligence should prompt investors to shift focus from technology to companies that toil in the physical world, like miners, power producers and industrial firms, according to Ulrike Hoffmann-Burchardi, global head of equities and chief investment officer for the Americas at UBS Wealth Management.
Her firm is embarking on morphing portfolios from targeting “bits to atoms,” she said on the sidelines of a financial industry conference in Miami Beach on Tuesday. That means buying shares of equipment makers, power generators and resources miners — companies that build the physical infrastructure necessary to drive the modern economy.
The move comes at the expense of tech firms, long darlings of the AI trade that powered the stock market for the past three years. There are parts of the technology sector vulnerable to disruption, she said, notably software companies, but also service providers like law and financial firms that rely on software, Hoffmann-Burchardi said.
While the CIO expects AI will rattle a large swath of industries, she anticipates a strong economic backdrop combined with monetary easing can still keep powering stocks higher.
“The macro is very, very supportive — however, I think the AI portion is going to get more tricky,” she said. “The last few years, it seems like a tide that lifted all boats, but this year, AI is going to be increasingly a differentiator between winners and losers. The whole digital economy could be reimagined through AI, and that is a risk for broad sectors of the equity market.”
UBS downgraded the information technology and communication services sectors of the S&P 500 Index and is instead buying “the physical parts” of the US equity benchmark.
The move comes as the tech-led stock rally has all but stalled since late October. Technology companies in the S&P have lost 8.6% since the index hit a record Oct. 28. Energy and materials producers have rallied at least 20% in that time as investors moved from winners into sectors that had been lagging behind.
The rotation has taken on more urgency in recent weeks as several AI tools threatened to upend entire industries, from software coding to wealth management. Intellectual property that had commanded strong equity multiples suddenly looks less valuable. Instead, physical property — things not easily or at all replicable by AI — have come into fashion.
Hoffmann-Burchardi said intangible businesses and long-duration investments such as private equity should now command higher risk premiums in an AI-driven world, while companies with tangible assets may prove to be more resilient. As far as seeking any stock-selection opportunities in the recent software wreckage, UBS favors firms adopting an “AI first” strategy rather than broad exposure to the sector.
The reason, she said, is that unlike in previous technological regime shifts, AI is self-learning, making the pace of change faster and less predictable. Rapid advances in coding, from generating snippets to building entire software architectures, determine how swiftly business models can be challenged. That dynamic is raising uncertainty premiums across markets and forcing investors to rethink traditional assumptions about what businesses are vulnerable to disruption.
As the rotation churns under the market’s surface, UBS Global Wealth remains constructive on the equity market overall, expecting a “great broadening” of leadership after years of extreme concentration. Fiscal stimulus across major economies from the US to China to Germany to Japan, combined with ongoing monetary easing by the Federal Reserve, creates an unusually supportive macroeconomic backdrop for stocks that’s poised to lift growth and corporate earnings, the firm said.
“In the US in particular, you have both fiscal and monetary stimulus working together — that’s quite unique,” Hoffmann-Burchardi said. “If you look back at the history of financial markets, usually that only happens in a crisis, but now we have it in a growth environment. For us, that means we are likely going to see higher GDP growth this year compared to last year.”
Geographically, the bank is encouraging more diversification, including to emerging markets after a prolonged period of US dominance. Still, Ulrike Hoffmann-Burchardi said the US remains structurally advantaged over the long term given its concentration of innovation, capital inflows and leadership across industries such as AI, electrification and health-care longevity.
One of the biggest concerns for the CIO is whether the surge in capital spending on AI will generate the profits needed to justify valuations. For now, expectations for resilient growth, ebbing inflation and additional interest rate cuts by the Fed this year are set to support stocks — particularly if earnings begin to surprise to the upside and expand beyond technology giants.
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