Half of ‘Big Money’ Managers Say the AI Boom Has Years Left to Run

The optimists in Barron’s fall poll cite robust earnings growth; the pessimists see a bubble in danger of bursting. Plus, the pros’ forecasts for rates, midterms, and more.

(Illustration by Barron’s; Dreamstime (2))

Key Points

Half of the money managers responding to Barron’s fall Big Money poll are bullish about the outlook for U.S. stocks over the next 12 months.
The share of bullish managers fell to 50% from 54% in the spring, while the share of bears rose to 24% from 17% in April.
Twenty-seven percent of the surveyed managers call a potential artificial-intelligence slowdown the biggest risk the market faces in the next six months.

There is plenty to worry about in the current investment climate, if you’re so inclined. Bond yields soared this past summer, interest rates look set to rise, and the artificial-intelligence boom that has powered the economy and stock market for the past few years may be unsustainable. But there is just as much—if not more—to celebrate, including a healthy economy, robust growth in corporate earnings, and the likelihood that the same AI boom will continue for several more years, at least.

Half the money managers responding to Barron’s fall Big Money poll take the sunny view, calling themselves bullish about the outlook for U.S. stocks over the next 12 months. Based on their mean response, the bulls forecast that the Dow Jones Industrials will rise another 9% by the end of 2027.

The Big Money bulls are optimistic about the trajectory of the S&P 500 and Nasdaq Composite , too, predicting that the two equity indexes will gain 8% and 13%, respectively, by the end of next year. They see the S&P 500 ending 2027 at 8366, and the Nasdaq finishing next year at 29,527.

“The AI capex [capital expenditure] cycle will continue in 2027,” says Michael Arone, chief investment strategist at State Street Global Advisors in Boston. “People underestimate that. Spending in the late-1990s [dot-com era] bubble days lasted for eight years. It has been just four years since the launch of ChatGPT. Investors need to gravitate to where the earnings growth is, profit margins are, and opportunity exists.”

Harris Nydick, co-managing member of CFS Investment Advisory Services in Totowa, N.J., agrees. The stock market is “still in the early innings” of the AI boom, he says, adding that the S&P 500 could climb as high as 9000 before this market cycle turns.

The bulls’ ranks have thinned slightly this fall from 54% in our spring survey. The bears’ camp has grown, measuring 24% of respondents, up from 17% in April. Some 26% of managers now call themselves neutral on the market outlook, slightly lower than in the spring.

Forty percent of managers consider the market overvalued, while 10% say stocks are undervalued, roughly on par with the spring poll.

Bill Smead, chief investment officer at Smead Capital Management in Phoenix, is a Big Money bear who thinks stocks are overpriced. Too much of the U.S. market is leveraged to the AI trade, he says. “All of this capital is crammed into one sector. That’s a risk to the economy and the markets,” says Smead.

Amy Robinson, CEO of Robinson Value Management in San Antonio, calls herself neutral on stocks but similarly sees risks in AI-related companies’ strategies and their shares. Robinson calls Nvidia the market’s most overvalued stock, saying its investments in customers remind her of the circular vendor financing of the dot-com era. Nvidia has helped fund or guarantee loans for many customers’ purchases of Nvidia chips, which are central to AI compute.

Barron’s conducts the Big Money poll, a survey of professional investors, twice yearly, with the help of Erdos Media Research in Ramsey, N.J. The latest poll, completed Sept. 23 to Oct. 15, drew responses from 81 investment professionals from around the country.

The survey period was a choppy one for stocks, as bond yields rose sharply in late September and then retreated. The Federal Reserve raised interest rates by a quarter of a percentage point at its Sept. 15-16 meeting, just ahead of the survey’s launch.

The higher cost of capital and the strength and longevity of “the AI trade” are top of mind for many Big Money pros. Twenty-seven percent of respondents call a potential AI slowdown the biggest risk the market will face in the next six months. The same percentage say rising interest rates are the biggest worry, while 17% cite higher bond yields.

The Fed’s policy committee voted to leave the federal-funds rate target range unchanged at 3.75% to 4.00% at its Oct. 28-29 meeting. But with inflation still well above the Fed’s 2% annual target, futures traders place roughly 75% odds on another quarter-point rate increase in December.

“I appreciate that rates have been this high before, but there has been a huge and rapid repricing in the fixed-income market,” says Joe Gilbert, a portfolio manager at Integrity Asset Management in Rocky River, Ohio.

The benchmark 10-year Treasury note yield hit a 24-year high of 5.36% in early October, up from 4.80% at the start of September—a huge move in yield terms. It has since retreated to just below 5%.

The outlook for tech stocks, in particular AI-related names, is polarizing for the Big Money crowd, as it is for the market generally. The S&P 500 has made almost no headway since mid-August amid growing concerns about the cost of the AI buildout and the ultimate payoff from this revolutionary technology.

Thirty-one percent of Big Money managers consider information technology the most attractive sector for the next 12 months, followed by healthcare, at 26%. Yet 22% of poll respondents think info tech is the least attractive sector.

Lori Keith, a portfolio manager at San Francisco–based Parnassus Investments, is a tech bull. “There are high expectations and tech is a crowded trade, but these are still early days around adoption for AI,” she says.

Just 37% of poll respondents think current corporate spending on AI infrastructure will yield a positive return in the next 24 months. Thirty-two percent think it won’t, and the remainder say it is too soon to know.

David Hartzell, president and CEO of Cornell Capital Management in Clarence Center, N.Y., says AI will be “mind-boggling for the next decade.” The challenge, he says, is picking long-term winners, or “the individual stocks that will be around in the next 10 years.”

Hartzell is sticking with an index fund, the Vanguard S&P 500 exchange-traded fund, which trades under the ticker VOO. “If you buy VOO, you get all the good stocks, and the bad stocks will eventually drop out of the picture,” he says. “It’s the best way to play the tech boom.”

Much of the bullish case for U.S. stocks rests on the outlook for corporate earnings, which has seldom, if ever, been so rosy—again, largely due to tech-related spending. S&P 500 earnings per share are on track to grow 34.4% this year to $362.89, according to estimates gathered by FactSet, and about 16% in 2027 to $420.43.

Most Big Money respondents are also counting on decent earnings growth next year, although they aren’t as ebullient as industry analysts. Forty percent of poll participants forecast that corporate earnings will grow at least 11% in 2027, with about a third predicting profits will rise a more modest 6% to 10%, roughly in line with the historic average.

“You can have sector corrections, but the market as a whole still looks attractive because earnings are going up,” says Kayvan Karoon, president and CEO of KS Capital Management in Rochelle Park, N.J.

The S&P 500 currently trades for 18.4 times 2027 estimates, slightly below the five-year average of 19.3 and down from 22.7 in January. “Unless you think earnings are going to collapse, this isn’t an expensive valuation,” says Jose Medeiros, managing partner at Stonerise Capital Partners in San Francisco. “People expect a deceleration in earnings growth, and there are still lofty expectations. But they probably will be met.”

Hal Andersen, co-founder and partner at Soltis Investment Advisors in St. George, Utah, says he is “amazed by the strength in profitability.” He expects the tech sector to continue leading on earnings growth, while other sectors contribute more gains in coming months.

Nearly half of the Big Money managers expect U.S. stocks to outperform other markets in the next 12 months. Yet 71% say they are bullish on non-U.S. equities, and 38% plan to increase their allocation to non-U.S. stocks over the next year. European banks are especially attractive, says Ryan Payne, president of Payne Capital Management in New York. “I see more profit growth ahead for them, and there are more catalysts to move them,” he says, noting that lending growth should strengthen as the European Union economy improves.

About a quarter of poll respondents think emerging markets will perform best in the year ahead. But Louis Lau, director of investments at San Diego’s Brandes Investment Partners and co-manager of the Brandes Emerging Markets Value fund, cautions against great expectations. “One big concern is that in times of higher U.S. yields and interest rates and higher oil prices, you also have a higher dollar,” he says. “That isn’t the best setup for EM.”

Bonds still don’t have many fans among the Big Money crowd, which has largely been bearish on fixed income for several years. (Bond prices move inversely to yields.) But the disdain isn’t universal. “After years of suffering, you can now grab yield,” says Cesar Manent, principal at 5th Street Advisors in Stamford, Conn. “One of our biggest themes is to own a lot of income-generating assets. You can do that on the bond side with short duration of around three years.”

With the Fed expected to raise interest rates again in coming months, many bond investors favor shorter-duration investments. They are less sensitive to rate changes than longer-duration assets and allow for quicker reinvestment when rates rise.

Two-thirds of poll respondents think the federal-funds rate will end this year in a range of 4% to 4.25%, implying one rate increase at the Fed’s December policy meeting. Forty-three percent think the fed-funds rate will be higher than 4.25% by the end of next year. Just 10% think rates are too restrictive at current levels, while 54% think rates are just right.

Kevin Warsh, who became Fed chairman in May, gets a round of applause from the Big Money men and women for his conduct of monetary policy; 71% view him favorably. Andersen, of Soltis, thinks Warsh is in a tough spot, and he isn’t alone. “Inflation is hot, the energy component in particular,” says Andersen. “We’re still hopeful that the [Iran] war can end and oil markets will return to normal. The Fed may not have to keep raising rates then.”

Fiscal policy is another matter. Only 5% of managers give the Trump administration an A for its conduct of fiscal policy, while 60% grade the White House D or F. Lau doled out a failing grade, blaming it on “the combination of tariffs and lack of a coherent plan to bring more manufacturing back to the U.S.”

Sandra S. Martin, managing director of Martin Investment Management, which has offices in Palm Beach Gardens, Fla., and Evanston, Ill., is more blunt. “There is no constructive fiscal policy,” she says, calling the president’s tariff policy “like shooting yourself in the foot.”

Tim Ewing, managing director of Mesirow Financial Investment Management in Chicago, says the fiscal backdrop concerns him. “You have a government that is spending out of control, so it can’t be surprising to see that the 10-year Treasury yield is up,” he says.

The managers see a change coming in government, if not in policy. Eighty-four percent expect the Democrats to win control of Congress in Tuesday’s midterm elections, although two-thirds think the Republicans will retain control of the Senate.

Our fall poll finds only 51% of respondents beating the S&P 500’s performance this year both personally and professionally. That speaks to the investment challenges posed by the market’s concentration in tech and a changing macro backdrop. It also may explain the divergence of sentiment in our latest Big Money poll.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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