AI may be dominating the stock market, but its future growth is far from guaranteed.
“This trade is very nonlinear and volatile in nature,” Goldman Sachs analyst Eric Sheridan said on Yahoo Finance’s Opening Bid.
The AI market is still developing, moving through distinct phases that have each presented unique investment opportunities and risks, Sheridan added.
The first phase focused heavily on infrastructure — building out data centers, cloud networks, and powerful chips to support AI’s rapid growth. But now the focus is moving toward the “application layer,” where companies are figuring out how to use AI in real-world products and services.
The shift is critical because there are “very different skews” between how AI is being adopted by consumers versus businesses, per Sheridan.
“People are much more likely to adopt AI in their consumer computing habits than their enterprise computing habits,” he explained, adding that consumers see less risk in AI and don’t feel it will hurt their ability to earn money.
However, the adoption of AI by large companies is riskier. “Enterprises have to operate within strict budget requirements,” Sheridan said. “You also run into some friction on the employee side with respect to how they use AI in their own individual workflows.”
These differences in adoption could affect the growth potential of AI stocks. While AI applications for consumers are advancing rapidly, businesses may take longer to integrate AI on a wide scale.
In a note to clients, Goldman analyst Ryan Hammond wrote that the AI stock market suggests valuations may already be ahead of themselves.
AI-exposed stocks rallied by 32% in 2024, though they remain below the levels seen during the tech bubble and 2021. Nonetheless, Hammond cautions that the eventual slowdown in hyperscaler capital expenditures could create risks for these stocks.
“Timing this inflection is challenging,” he noted, adding that the next few quarters will be critical in determining whether AI-driven infrastructure companies can continue to deliver the growth investors are expecting.
Meta (META) has remained bullish on the technology, with plans to invest $600 billion in the US through 2028 to develop AI infrastructure.
Sheridan is cautious about the long-term financial impact, though he pointed out the company is already seeing results. Meta is among several digital platforms — including Alphabet (GOOGL, GOOG) and Pinterest (PINS) — that could benefit from AI disrupting traditional advertising.
“Deploying more AI into their content recommendation engine resulted in a mid-single-digit increase sequentially in engagement,” he said, citing Instagram.
Tech stocks and their outlook will be top of mind as Yahoo Finance Executive Editor Brian Sozzi descends upon the Goldman Sachs Communacopia tech and media conference in San Francisco next week. He will be live on air from the conference on Monday and Tuesday with a steady drumbeat of big market-moving interviews. You can watch it here, on the Yahoo Finance app, or on all major streaming platforms.
Francisco Velasquez is a Reporter at Yahoo Finance. He can be reached on LinkedIn and X, or via email at francisco.velasquez@yahooinc.com.
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