Investors Shift Focus to AI Profitability and Margins

Investors are shifting their focus away from AI infrastructure providers toward non-AI firms that can demonstrate concrete profit margin improvements through the adoption of the technology. While half of S&P 500 companies mentioned AI's potential to increase margins during second-quarter earnings calls, Goldman Sachs reports that only 2% have quantified the actual impact on earnings and 11% have cited specific use cases.

Ellen Zentner, Chief Economist at Morgan Stanley Wealth Management, predicts that the next wave of AI rewards will favor companies using the technology to lower costs and improve decision-making rather than those simply building infrastructure. This trend is expected to be most prominent in the retail, financial, and healthcare sectors.

Recent research from Morgan Stanley indicates that share prices are increasingly tied to upward revisions in earnings and free cash flow. This shift comes as rising interest rates heighten investor scrutiny regarding cash flows and the tangible financial benefits of AI integration.