Beyond Big Tech: Discovering promising values

US economy is more resilient than expected

Despite a tense geopolitical environment and ongoing concerns regarding the Middle East conflict, the global economic outlook remains robust overall. Growth forecasts have been revised downwards slightly from 3.3% to 3.1%, but without significantly affecting the momentum of the US economy.

Nevertheless, signs of a slowdown are emerging in the United States:

• Consumption: slowing consumer spending, as evidenced, for example, by the decline in credit card spending.
• Energy: petrol prices of over $4 a gallon are dampening household spending, while the fiscal scope to cushion the shock is limited.
• Personal loans: Initial strains in the personal loans segment ($1.5 trillion). Although this is not systemically significant compared to the much larger mortgage market ($12 trillion), developments must be monitored closely.

However, these vulnerabilities are largely offset by the exceptional momentum of investment in technology and artificial intelligence. The technology sector now accounts for a large share of US growth (40%) and continues to make a significant contribution to corporate profits, whilst also acting as a buffer.

The biggest risk: rising interest rates
Even more than the economic slowdown, rising long-term interest rates are a cause for concern. If the yield on 10-year US government bonds rises above 5.5%, the wealth effect – which is driven by price increases in both property and the financial markets – could lose momentum. As a “property man”, Trump has a strong interest in seeing interest rates stabilise before the mid-term elections.

Artificial intelligence is fundamentally changing market structures

The markets have entered a phase of extraordinary growth. Revenue increases of 80 per cent and a doubling or even tripling of profits among leading semiconductor manufacturers show that historical benchmarkBenchmarkA standard for comparing investment success. Benchmarks are often a market index or a combination of several indices that guide investment objectives and the investment universe.s are no longer sufficient to adequately contextualise these developments. Much like the exponential growth of Covid, which nobody foresaw, the growth of artificial intelligence is also shattering conventional thinking.

A company growing by 50 per cent annually may seem expensive today but appear cheap in just two years’ time. This logic is currently gaining ground in the tech sector’s infrastructure segment – and it explains the remarkable resilience of the stock markets despite ongoing interest rate pressure.

Where do we stand with the expansion of AI?

Fund managers specialising in technology currently rate the expansion of AI infrastructure at just level 2 on a scale of 1 to 10. In other words: we are still right at the beginning. A fitting analogy is the construction of a city: at present, the foundations are being laid and the roads built. The next wave – in which all economic sectors ‘populate’ this infrastructure – lies entirely ahead of us. The resulting productivity gains could even surpass those of the internet.

In the tech sector: winners and losers

It is now misleading to speak of “the tech sector” as a homogeneous bloc. Over a three-year period, the performance gap between AI infrastructure and traditional software providers stands at around 300%. Simply buying a NASDAQ ETF today means placing a bet that covers both extremes at once.

The Microsoft example: reinventing itself to survive
Microsoft demonstrates how a software manufacturer can proactively transform itself rather than merely reacting to change. By integrating AI token quotas and limits into Microsoft 365, the company is monetising access to AI models as an additional layer of value within its ecosystem. Computing capacity for AI thus becomes part of remuneration and productivity – and Microsoft regains control over the value chain. Providers such as Duolingo, which are largely focused on a single product, do not have this strategic leeway.

How to invest: The momentum approach

In such a disruptive environment, individual stock selection is becoming increasingly complex, even for professionals. Disruption can render an investment strategy obsolete overnight. The question is therefore not ‘Should one remain invested?’ (the answer is yes), but ‘How can this positioning be made robust?’

The momentum factor: a market anomaly proven over 40 years

The momentum strategy is based on a solid empirical observation: the stocks that have performed best tend to continue to outperform, and vice versa. This phenomenon is driven by well-documented cognitive biases: overconfidence, herd behaviour, and the fear of missing out (“FOMO”).

Over a 40-year period, based on MSCI data, the momentum factor outperforms all other factors (value, quality, growth). The strategy that ODDO BHF AM has been pursuing on this basis for 20 years has outperformed the S&P 500 by +1.5% per year, with a risk profile like that of the index.

How does this work in practice?

• Identifying stocks whose long-term trend remains intact and whose volatility is limited (indicating solid fundamentals underpinning price movements).
• Building a portfolio with explicit sectoral restrictions to avoid excessive concentration in the technology sector whilst maintaining an overweight position in stocks with strong momentum.
• Staying close to the benchmark index in terms of risk whilst outperforming it.

Why not an S&P 500 Equal Weight ETF?
Whilst equal momentum. In a trending market such as this, polarisation is a reality that must be captured and managed – not eliminated. Reducing the weighting of Nvidia to the level of a regional utility would mean missing out on the market’s structural growth driver.weighting reduces concentration, it simultaneously dilutes exposure to stocks with strong

Beyond Big Tech: Where can value be found?

Sectors in the US benefiting from AI

It is not only direct technology companies that will benefit from the AI revolution. As infrastructure expands, all economic sectors will begin to ‘populate the city’, i.e. monetise the productivity gains enabled by AI.

• Energy: Utilities & electrification (direct beneficiaries of the energy boom linked to data centres).
• Finance: Banks and insurance companies (massive use of AI agents. HSBC has announced the loss of 37,000 jobs; the pace of efficiency gains is unprecedented).
• Healthcare: diagnostics, research, administration (AI is being introduced at a rapid pace here).

China: second strategic pillar

China is often underrepresented in Western portfolios – a mistake that should be corrected. The Five-Year Plan has specifically redirected state subsidies from the property sector to high-tech industries, including quantum, nuclear and robotics. In the field of robotics in particular, China has now overtaken Japan and is on a par with the US.

• Talent pool: Nine times as many engineers are trained annually as in the US.
• Valuations: Attractive valuations, policies to support the stock markets to generate a wealth effect and boost domestic consumption.
• Robotics: A clear lead in industrial robotics – a segment in which the quality of Chinese manufacturers now exceeds that of Japanese ones.

Social and geopolitical challenges to consider

The AI revolution extends far beyond purely financial aspects. It is reshaping the economic, social and geopolitical landscape – developments that must be incorporated into investors’ analytical models in future

• Deflation: In the medium term, AI is likely to have a significant deflationary effect through productivity gains. This is a key factor underpinning the positive outlook for risky assets.
• Employment & social cohesion: However, the accelerated job cuts (for example at HSBC and across the financial sector as a whole) raise questions regarding social acceptance and wealth distribution that governments must address.
• Geopolitics: Technological supremacy has become a core component of the foreign policy of both the US and China. Issues such as data sovereignty and AI regulation will have a significant impact on the valuations of entire sectors.
• Allocation: In this environment, stock selection alone is not enough. Geopolitical, regulatory and societal factors must be an integral part of portfolio construction.

Conclusion: What are the approaches to asset allocation?

In our view, the technology sector remains indispensable: it accounts for 40% of US growth and the bulk of future productivity gains. However, the dispersion within the sector is now so wide that a naive index-tracking approach carries significant asymmetric risks. The key could lie in strict selectivity, a systematic momentum approach and well-thought-out diversification.

Our investment solutions*

• For US equities
  Smart momentum strategy for US equities: overweight in AI infrastructure, supported by strict sectoral diversification.
• On the topic of tech/AI
  The “Global Artificial Intelligence” fund to capture the second wave (AI monetization across sectors) with more controlled volatility than a pure tech fund.
• In other markets
  Chinese equities: Look for undervalued stocks, dynamic cutting-edge technology (robotics, engineering), political support from the authorities.
• Risks to consider
  Exclusive focus on software manufacturers or unfiltered NASDAQ ETFs. Risk of a -30% to -50% decline in the event of a disruption to the business model.
  
  
  

* The solutions mentioned above notably involve a risk of capital loss.

This document is for information purposes only and does not constitute investment advice.

ODDO BHF AM is the asset management division of the ODDO BHF Group. It is the common brand of three legally separate asset management companies: ODDO BHF AM SAS (France), ODDO BHF AM GmbH (Germany) and ODDO BHF AM Lux (Luxembourg).

Any opinions presented in this document result from our market forecasts on the publication date. They are subject to change according to market conditions and ODDO BHF ASSET MANAGEMENT SAS shall not in any case be held contractually liable for them.

Before deciding to invest in any asset class, it is highly recommended to potential investors to inquire in detail the risks to which these asset classes are exposed including the risk of capital loss.