AI, the Economy and Your Portfolio

We have been receiving questions about AI and its role in client portfolios. Some clients wonder whether they have enough exposure to benefit from AI's growth. Others are concerned that their portfolios have become too dependent on its success. Our approach is designed to address both concerns through broad diversification, which may allow you to participate in AI's growth while limiting reliance on any particular company or industry.

AI's Growing Role in the Economy

The economy has continued to grow despite higher energy prices, rising borrowing costs, and international conflict that put pressure on household budgets and business expenses. One important reason is the enormous investment in artificial intelligence. Companies are spending heavily on chips, servers, data centers, and the electricity needed to operate them. The spending supports construction firms, equipment manufacturers, and power providers as well as technology companies. Businesses adopting AI are also exploring ways to reduce costs, improve their work, and serve customers.

In September, J.P. Morgan Asset Management estimated that the largest cloud-computing companies were on track to spend nearly $800 billion on capital expenditures in 2026, including projects outside the United States and spending beyond AI. In the same analysis, J.P. Morgan estimated that its measure of AI-related investment accounted for roughly one-fifth of U.S. economic growth over the preceding year, after adjusting for imported equipment.

The spending is helping support economic growth today, while much of the financial payoff depends on how businesses and consumers use AI in the years ahead. Companies are committing billions of dollars to facilities and equipment before knowing how much customers will ultimately pay for AI services. We can see why businesses want to invest early, particularly when they risk falling behind competitors. Even so, the ability to build more powerful technology does not tell us whether the resulting revenue and profits will justify the billions companies are investing in AI.

AI's Potential and What It Means for Investors

AI is already changing how businesses operate and serve their customers, and there is considerable potential in its continued development. The benefits extend beyond technology companies, with businesses using AI to reduce costs, improve products, and strengthen customer service. Some are already reporting measurable financial benefits. For shareholders, however, returns depend partly on how much they pay to own a company's shares relative to the earnings the business ultimately delivers. Even when sales and profits grow, shareholder returns can be strong or disappointing depending on whether the results exceed or fall short of the expectations already reflected in the share price.

How We Are Thinking About Your Portfolio

We do not build portfolios around predictions about the economy or the next market move. Wars, elections, and changes in government policy can quickly change the outlook for businesses and investors. Even if we correctly anticipated an event, we would still need to know how much markets had already accounted for, how investors would react, and when to change the portfolio. We do not believe anyone can make those calls consistently enough to build your financial plan around them.

Our portfolios are built with the expectation that economic conditions will change and unexpected events will occur. Equity allocations extend beyond large U.S. companies to include smaller companies, international developed markets, and emerging markets. Our broadly diversified funds include businesses developing, supplying, and using AI, alongside companies serving other needs throughout the economy. Owning businesses across company sizes, industries, and countries may allow you to participate in growth from many sources while reducing reliance on any one part of the market.

Maintaining broad diversification requires patience. When a small group of stocks drives market gains, a diversified portfolio may earn less than a portfolio concentrated in those stocks. A concentrated portfolio, however, can suffer greater losses if its leading companies disappoint investors. We accept the possibility of lower returns during periods of narrow market leadership in exchange for reducing your financial plan's dependence on a handful of companies.

Our emphasis on short-term, high-quality bonds is intended to provide income and access to funds for anticipated withdrawals, complementing the long-term growth we seek from stocks. Portfolios will still experience volatility, and diversification does not ensure a profit or protect against loss. We use this combination to support your planning needs rather than relying heavily on one part of the market.

Through Master Planning, we consider your investments alongside your spending, taxes, family responsibilities, and longer-term goals. Results vary with individual circumstances, so the right approach for one household may differ from another.

Questions About AI and Your Portfolio

If the news about AI, or other items, has raised questions or concerns for you, please bring them to our next conversation or contact us sooner. We welcome the opportunity to discuss your questions and how your portfolio supports your financial goals. Schedule a Conversation to get started.