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The US$21 trillion question: is AI an opportunity or excess?

Top convictions

  • AI-led surge will continue, but monetisation is yet to be proven and there are growing risks
  • Need for diversification and rotation out of the US will support income plays
  • Valuations point to opportunities in Europe; Japan is returning to growth, and a broader bull market in China may just be getting going

What is the answer to the US$21 trillion question?1 That’s the current dollar value of the US tech sector, although, in reality, the stakes may be higher. It is years since so much in the US stock market has rested on one central idea and AI is without doubt that: an all-pervasive trend that will shake the future and which cannot be ignored. It demands investment in more than one sense, and the powerful earnings growth trend it has spurred will continue into 2026. But we have been here before, and we know that revolutions rarely proceed smoothly.

The changes the new tech brings will be as dramatic as those of the internet in the 1990s, and in the US tech leaders we have companies with the ammunition necessary to deliver the scale of investment required.

“AI needs to be seen in the context of broader AI businesses,” says one of our tech analysts Jonathan Tseng. “The correct question to be asking is not 'is AI in a bubble' it is 'are current hyperscaler businesses – including the ones generating hundreds of billions of dollars of cash and trading on a mid-20-times multiple – in a bubble?'”

In a time of major industrial and technological upheaval, investors sense the opportunity for outsized gains. These can be made from backing the first movers, the leaders of the new or revolutionised industry, as well as the companies that provide this generation’s picks-and-shovels.

However, the high levels of uncertainty about how the future will actually pan out put a premium on pinpointing the real winners. Many ideas, projects, and companies get funded and valuations have been bid up broadly, and not every company will end up generating the earnings and cashflow to justify it.

Something gotta give

The overall mood of the analyst teams who I work with is positive, and market valuations reflect that. In early November, the S&P 500 was trading at just under 24 times forward price-to-earnings. Historically, we have found ourselves at these levels less than 5% of the time.

Tech and consumer discretionary stocks are more extreme; both trade in the low 30s multiple of earnings. Will that be justified by the reality of earnings in the quarters ahead? For tech, there are strong indications on the ground that the growth outlook is improving. When we asked our analysts this time last year whether they expected AI to improve profitability in 2025 only a quarter (26%) said yes. That figure has since doubled to almost half of the whole survey.

In stark contrast, many of our analysts point to weakness in the US consumer as a top concern over the next year and my feeling is that behind this are contradictions that will need to be resolved in the months ahead.

If AI is beginning to work as a business model for more companies – as our survey and the market valuations suggest – it will do so by delivering productivity gains. It is difficult to see that happening without some movement on corporate layoffs, of which there are already signs. More profits and more stock market gains are a positive story for the economy, but job cuts less so.

Secondly, consumer staples and discretionary may be only 21% of the S&P compared to 46% for tech and communications – but American consumers themselves account for nearly 70% of US GDP, so weakness here would have multiple effects. Will a combination of the capital gains from rising stock markets and the sheer scale of investment in tech be enough to fend off that weakness?

Prices, pressure points

For now, the answer on balance seems to be yes and we see real substance and optimism in the fundamentals underpinning the market. We expect the mid-to-high single digit earnings growth of 2025 to strengthen into double digits across all of the major regions we look at in 2026. That includes information technology (IT) sector profit growth of 25%.

There is, however, a need to diversify risk. Many of the investors I talk to are examining their geographical allocations in light of the political events of the past year. Any hiccups in the current generous growth expectations or from politics and policy would support actual moves in capital.

The case for Europe has strengthened considerably. Falling inflation, lower interest rates, and fiscal support all provide a supportive backdrop for corporate investment and consumer confidence. Aerospace and defence stocks are benefitting from the re-arm Europe trade. But European companies should not be seen as proxies for the region’s economy. They are global businesses with resilient balance sheets and proven growth profiles.

China increasingly looks reminiscent of the US market in terms of the progress being made by its companies on technology and innovation – but here positioning is not crowded and valuations are low. Worries about the trade conflict with the US have cooled and it’s clear that the government understands the importance of fiscal spending as a tool to reboot the market and the economy. Furthermore, the increased focus on ending blistering price wars can help corporate earnings inflect back to meaningful growth. The hints of a broader bull market are clear to see.

Japan stands out in our analyst survey as a source of optimism. The country is emerging from the staid years of low inflation and low interest rates. Wages are improving and consumer spending power is growing. Corporate governance reforms have fed the market too and helped spur a copycat process in Korea that is upending years of discount valuations and low dividend payments – see our Asia outlook for more.

In short, while there is much to be concerned about, the sources of strong returns for the next year are out there. There may just be more variation than we have seen in the last 12 months.

 

1: The total market capitalisation of the Mag 7 group of leading US tech companies, excluding Tesla Inc, was US$21.438 trillion on Nov. 17, 2025. These values vary with intraday market movements. Source: Refinitiv Workspace.

 

Niamh Brodie-Machura is Chief Investment Officer, Equities at Fidelity International, a sponsor of Firstlinks. The views are her own. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL 409340 (‘Fidelity Australia’), a member of the FIL Limited group of companies commonly known as Fidelity or Fidelity International. This document is intended as general information only. You should consider the relevant Product Disclosure Statement available on our website www.fidelity.com.au.

For more articles and papers from Fidelity, please click here.

© 2026 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

 

  •   14 January 2026
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