In a recent report, Morgan Stanley addressed the rapidly evolving landscape of AI integration and its impact on various sectors. This comprehensive study, an update from our Q4 2023 survey, notes shifts in AI exposure and relative importance across a broad range of stocks, and provides a detailed map of the rate of change in AI.
According to its findings, 337 stocks, representing more than $11 trillion in market capitalization, changed their AI exposure categories.
This includes shifts in exposure from categories such as “adopted” to “empowered.” For example, Morgan Stanley notes that AI “is now more important for 97% of utility coverage,” indicating significant integration of AI technologies in this sector. This represents a significant increase from previous levels, reflecting the growing role of artificial intelligence in enhancing operational processes. Efficiency and addressing energy bottlenecks.
The study also notes that the relative importance of AI in investment thesis has increased significantly, with 446 stocks worth $15 trillion seeing changes in this regard. The increasing importance is due to the ability of artificial intelligence to provide operational efficiencies, productivity gains and innovative solutions across industries.
“AI is becoming more important to the investment case,” the company wrote.
Morgan Stanley emphasizes that measuring the rate of change in AI is critical to identifying additional alpha opportunities. Their global mapping efforts, even at this early stage of AI deployment, aim to provide a clearer understanding of these opportunities.
The report identifies two key strategies for generating alpha from AI:
1)'Enablers of increasing relative importance to artificial intelligence: Stocks reclassified as having “foundation-to-thesis” exposure to AI have seen a rise of more than 25% year-to-date. Morgan Stanley suggests that investors should continue to focus on these enablers, as they now show a 20% rise in Morgan Stanley's core target prices, compared to a 14% rise for those fundamentals alone.
On a sector basis, utilities, which have already delivered 15% alpha since the beginning of the year, were highlighted for their additional upside potential.
2)'Adopters with strong pricing power': Companies identified as adopting AI and having strong pricing power outperformed those with less pricing power by 24% since the release of ChatGPT. Morgan Stanley expects this trend to continue, as it has identified 135 stocks that meet this criterion.
The report also details significant shifts in AI exposure and importance by sector. Facilities, materials and industries have seen significant changes, with a large number of companies reclassified as enablers or enablers/adopters. For example, the number of facilities identified as enablers has increased from about 3% to more than 30% in the past six months.
Morgan Stanley forecasts that AI-driven productivity gains will add approximately 30 basis points to net margin by 2025.
“Our industry cluster framework focusing on AI-driven efficiency gains supports this view with software/internet-related groups emerging as the biggest beneficiaries,” the report notes.
“In terms of industry drivers of productivity gains, our framework highlights that service-oriented pockets of the market hold a more significant opportunity for AI-driven efficiency gains,” he adds.
“These groups include software services, consumer services, healthcare equipment and services, financial services, and media and entertainment. These groups alone represent more than 30% of projected 2025 net income for the S&P 500, indicating a potential margin opportunity.”