Close Look - Does the AI rally still have room to run?

The background

The AI investment theme has been driving the markets higher in the recent past, despite all the uncertainties in the global geopolitical backdrop.

Investors’ hunger for AI-related stocks seem to know few bounds, with valuations of companies, whose most profitable years might be some way in the future, moving ever higher.

This was notably demonstrated by the huge demand for shares in the recent IPO (initial public offering) of SpaceX, the space rocket to AI group founded and controlled by Elon Musk. Since the initial trading surge valued the company at more than $2 trillion, some of this exuberance has waned. The stock recently suffered one of the biggest one-day losses on record, as investors took a more balanced view of its earnings prospects. Other tech-related stocks have also sold down over the past month, as investors weighed their valuations relative to other assets.

With OpenAI and Anthropic, the respective companies behind ChatGPT and Claude, also planning to raise money via a stock market listing, some have started to question if there’s still room to run on the AI investment theme.

Has AI investment started to deliver earnings growth?

As evidence of the earnings boost delivered by AI investment, we need only look at the US stock market, which is highly concentrated on the AI theme. Approximately 17% of the S&P 500 is composed of semi-conductor companies alone. Viewed as a whole, tech-related stocks now represent around 50% of the index.

Over the last 18 months, the pace of earnings growth within the IT sector, especially for semi-conductor companies, has accelerated significantly compared to the average for global stocks. This has benefited US, emerging market and to some extent Japanese stocks, although the impact is not as positive for European stocks.

Tech exceptionalism: Cumulative forward earnings per share

Source: Bloomberg, BNP Paribas Asset Management, 2 June 2026. Rebased to 100 as at graph start date. Past performance is not a guide to future performance.

Can AI and tech keep performing?

We believe the positive news about investment in the AI sector will continue to roll out. This can be viewed as a long-term structural growth trend, but this does not mean there are no risks in the AI investment theme. In our view, a selective approach will be crucial going forward, as investors need to look deeper to find those investments that offer the most potential.

We also think investors should expect volatility, especially in areas like the US and emerging markets where values have risen most. Asset prices are likely to swing considerably if high expectations are not met in the short term.

Our view

Over the medium term, we prefer US and emerging market equities, with selective exposure to technology stocks. As geopolitical conditions have eased somewhat after the US and Iran reached a Memorandum of Understanding, we have reverted to a neutral allocation to European equities. We maintain exposure to the US dollar to ensure diversification.

In fixed income we are equally selective, favouring global high yield and emerging market debt over government bonds, which remain under pressure.