Dawn Of an AI-Driven Growth Cycle
Nov 8, 2023
Jennison Associates’ Mark Baribeau is optimistic about the setup for growth stocks and secular themes poised to drive strong growth even if the economy slows.
BALANCED SETUP FOR GROWTH STOCKS
After a sharp valuation reset in 2022, investors rewarded companies with strong earnings growth in 2023. The tech sector led the broader market rally through most of the year due to artificial intelligence (AI) enthusiasm. But in the third quarter, the Fed’s “higher-for-longer” rhetoric dampened the excitement as investors started adjusting to the new rate reality and implications for growth stocks.
While investor sentiment has been impacted by uncertainty around the U.S. government shutdown, auto strikes, slowing consumer spending at lower income levels, the Israel-Hamas war, etc., the labor market and residential real estate remained resilient, pointing to a moderate slowdown ahead. Meanwhile, China is still recovering from the pandemic with reopening headwinds coming from a challenging real estate market and weaker consumer confidence.
While valuations are beginning to improve, thanks to solid earnings and revenue growth, they remain relatively low compared to historical averages. As such, we believe that the current setup is balanced for growth stocks going forward.
TECTONIC SHIFT TOWARD AI
With the expansion of AI, we’re seeing encouraging developments among software companies where they are embedding AI tools in their applications. Other enterprises will be evaluating AI products in 2024. From a revenue monetization perspective, we see substantial potential in cloud computing and infrastructure needed to enable AI development—both key focus areas that may bring compelling growth over the coming years.
KEY SECULAR GROWTH THEMES
We remain focused on finding the best secular growth opportunities around the world. Our focus on finding innovative companies naturally uncovers disruptive themes over time. Below are secular themes we see offering compelling growth opportunities based on our bottom-up research.
- Advanced technologies. AI and cloud computing continue to revolutionize industries, amplifying demand for increasingly intelligent software and infrastructure. We are optimistic about productivity-enhancing business applications that will be launched in the next 12 to 24 months. The best way to participate in the AI boom now is through the infrastructure layer where compute power is generated.
- Global consumer. As large, younger demographic populations with healthy disposable incomes are reshaping consumption patterns and generating persistent demand for luxury goods, we continue to favor strong, global consumer brands that have direct-to-consumer business models. These companies control customer engagement and inventory and are less susceptible to poor inventory practices and price markdowns. While not immune, the combination of resilient demand and strong price controls helps insulate the industry against broader economic headwinds.
- Transformative mobility. Evolving structural trends in electric vehicles, autonomy, and mobility-on-demand are creating new mobility ecosystems to get people and goods from point A to B more efficiently. These disruptive trends remain a leading growth engine.
- Industrial automation. A boom in manufacturing and high-tech facilities leveraging AI is driving advanced automation of industrial processes to enhance efficiencies. U.S. manufacturing capacity will continue to accelerate, driven by the U.S. CHIPS Act.
- Health care innovations. An innovation cycle marked by advanced research capabilities, game-changing therapies, and digital supply chains is fostering demand for more integrated health care ecosystems. We continue to see promising potential in leading-edge treatments for diabetes, obesity, cancer, and rare diseases.
- Fintech platforms. Consumers are rapidly embracing powerful financial technology platforms, particularly in areas where sophisticated financial systems are limited. Our focus remains on innovative technology platforms that provide better access to goods and services.
Mark Baribeau, CFA
Managing Director, Head of Global Equity Jennison Associates
Full Biography
For Financial Professional Use Only. Not For Use with The Public.
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