The past three years’ investment dashboard has centered most prominently on the “Magnificent 7,” a group of the U.S.’s largest and most innovative tech companies at the top of the AI adoption and enabling ecosystem.
OpenAI, a private company, is also widely known as a catalyst for the AI revolution, beginning with its launch of ChatGPT in November 2022.
These firms have also seen share prices and valuations rise dramatically over the period.
That widespread recognition can also bring lower returns and higher risk. The Magnificent 7 now represent about 35% of the S&P 500.
Our investment team at Florida Trust favors many of these leading firms, but we believe a basket approach at lower concentration can serve investors well.
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We also recommend looking beyond crowded trades for other opportunities as AI proliferates through the economy.
Industrials and the race to build data centers
The AI investment theme has driven renewed focus on several peripheral industry groups, including Industrials and Utilities.
A chase for turbines sold by companies such as GE Vernova, Siemens and Caterpillar to co-locate with new data centers is running in parallel with the better-documented chase for the world’s most advanced chips, made by Taiwan Semiconductor.
While the tech universe has garnered most of the headlines, the S&P Industrials sector has quietly been a top-performing group, up about 18% for the year.
Utilities and the power needed to support AI growth
Another bottleneck will be generating the power needed to operate these data centers.
Current estimates suggest the U.S. faces a 44-gigawatt aggregate power shortfall to meet the forecasted AI growth trajectory through 2028.
For reference, 1 gigawatt is roughly enough to power 750,000 homes.
This makes the Utility sector a direct beneficiary of broad AI adoption. Utilities often conjure the image of highly predictable but unspectacular operators with modest valuations. Historical price-to-earnings multiples have often been around 15 times earnings.
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That stems from the regulated regime they operate under. State controllers review and approve investments and rates and they effectively cap profit margins.
Utilities operate as monopolies without monopoly power and their growth prospects have historically been limited.
Some utilities are now being treated as proxies for AI demand. Several have seen share price appreciation and valuations more commonly associated with less defensive sectors.
Two examples are Constellation Energy and Dominion Energy.
Their coverage areas in Virginia include Loudoun County, often called “Data Center Alley,” which has the world’s largest concentration of data centers, with more than 25 million square feet of floor space.
Other second-order opportunities tied to AI adoption
There are several other second-order investment opportunities that could benefit from AI. Data center REITs such as Equinix and Digital Realty own and operate data center infrastructure.
Further upstream on the adoption side, a number of companies are using AI technologies to gain a competitive advantage.
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In some cases, AI has led to higher-quality products or services, such as Netflix’s improved content recommendations.
Meta has also improved ad targeting for customers across Facebook, Instagram and Threads.
In other cases, AI has allowed companies to increase profit margins through cost efficiencies. Walmart has applied AI in inventory management to reduce waste.
Florida Trust’s outlook on the AI investment landscape
The AI landscape is changing fast and the portfolio management team at Florida Trust stands ready to navigate a rapidly changing, complex and expanding investment environment.
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This information is not intended to be and should not be treated as legal advice, investment advice or tax advice. Readers, including professionals, should not rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.
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About Florida Trust Wealth Management
Florida Trust Wealth Management is an independent state-chartered trust company with more than $5 billion in assets under management.
It provides family office and wealth management services, including investment management, trust administration and financial counsel to high-net-worth individuals, families, businesses, foundations and endowments.
The firm focuses on absolute-return, performance-driven wealth management services.
Originally established in 2001, the company operated under its flagship name, The Sanibel Captiva Trust Company, for 25 years, including its divisions of The Naples Trust Company and The Tampa Bay Trust Company.
Offices are in Sanibel-Captiva, Fort Myers, Naples, Marco Island, Tampa, St. Petersburg, Belleair Bluffs and Tarpon Springs.
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