Mark Haefele, chief investment officer at UBS Global Wealth Management, discusses the outlook for artificial intelligence in 2025.

Mark Haefele at UBS Global Wealth Management recently highlighted how 2025 began with tech equities on a roll, consequently he remains bullish on the AI theme this year.

“The AI rally has helped power two straight years of strong returns for the NASDAQ Composite, including a 28 per cent rally last year,” Haefele said in a note. The Magnificent 7 group of large-cap tech names – Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia and Tesla – were responsible for more than half of the S&P 500’s gains in 2024. The NASDAQ's market cap now exceeds $32 trillion – with more than $13.5 trillion added in the last two years.

Some investors have asked whether they should lock in gains now, given the strong performance and potential headline risks in 2025. While the easy gains in AI might be behind us, Haefele thinks this rally looks far from over.

“Expect more upward revisions from large-cap tech on AI capex spending. Last year, continued upward revisions in AI capital expenditures from the Big 4 tech companies helped keep the AI rally on track amid periodic questions over its durability,” he said. Haefele expects the upward revisions to continue in the near term, leading him to revise up his estimates for their combined capex growth to reach $224 billion in 2024 (+51 per cent year-on-year), and $280 billion in 2025 (+25 per cent year-on-year). While these updated estimates suggest Big 4 spending could rise to match their historic peak capex intensity level, as measured by capex divided by sales, Haefele thinks fourth quarter 2024 earnings could potentially reveal further increases in guidance and commitments above this.

“Big tech firms will likely make more headway in monetizing their AI spending this year,” he said. While AI revenues are likely to lag again behind capex in 2025, he sees evidence that AI monetization is primed to improve sharply in 2025. “Cloud growth is accelerating for the leading three platforms, and a solid backlog supports AI monetization hopes. AI adoption is picking up across industries and is set to broaden in 2025, and the arrival of more clearly useful AI agents should further support return on investment (ROI),” he continued.

Haefele anticipates that the gap between AI capex and revenues will narrow in 2025. Companies adopting AI will use it to both increase their revenue and reduce their costs, which speaks to the utility of economic value add from AI as a key metric for monetization.

Haefele believes that AI valuations aren’t as stretched as one might think. “Over the past two years, most of the gains in AI stocks have come from impressive earnings performance, not from a significant expansion in price-to-earning ratios,” he said. “In fact, many AI stocks have seen their P/E multiples decrease even as their shares have risen, indicating a relatively more healthy market dynamic.” He anticipates that this revenue-led rally will continue in the year ahead, with his forecast for robust earnings growth near 25 per cent in 2025. While he sees several positive and negative drivers that could potentially change AI’s valuations, he thinks strong underlying EPS growth should be enough to support solid near-term share price performance.

“So, with a strong near-term visibility for tech, we remain bullish on the AI theme and maintain our positive view on AI semiconductors and leading cloud platforms. We remain constructive on quality large-cap AI names in particular, with strong seasonality in the first quarter another near-term driver,” Haefele said. While it will remain essential to monitor regulatory risks, such as export controls, ahead, he believes that any significant corrections on geopolitical or regulatory developments could offer attractive buying opportunities. “Investors should consider leveraging bouts of volatility via structured strategies or by purchasing quality AI stocks on dips. Within US equities, we rate the information technology sector as most preferred, and we expect improved breadth and wider participation in the tech rally this year,” he continued.

Although UBS has been flagging US-China regulation and geopolitics as a risk to sentiment in 2025, Haefele doesn't think this will overshadow strong earnings growth in key tech sectors. “Investors should be prepared for heightened headline volatility into the early months of the Donald Trump administration, and consider utilizing structured strategies to build up long-term allocation if their quality tech exposure is insufficient,” Haefele said.

AI is also expected to play an important role in wealth management, with many wealth managers seeing AI as complementing the banker's role, rather than replacing it, helping them to target their services more effectively. Benefits of AI range from automating repetitive tasks, providing data-driven advice in specific areas such as portfolio optimization, risk management and tax analysis. This news service has also marked AI as a key theme in our forward features calendar for 2025.