AI magic: from scarcity, abundance

AI-related revenues transforming into unusually strong profits

Are we in an AI bubble? We think the answer depends on whether AI can turn today’s scarcity into tomorrow’s abundance. Markets are increasingly pricing that outcome, expecting AI to lift productivity and growth enough to sustain today’s extraordinary earnings. Whether those earnings can endure – not where valuations sit relative to history – is key. Still-elevated margins suggest they can. We remain overweight U.S. equities, favoring the scarce inputs every AI system requires.

U.S. equities are enjoying an extraordinary earnings run. S&P 500 earnings are expected to grow 23% year on year in the second quarter, marking a seventh consecutive quarter of double-digit growth. The Shiller price-to-earnings (P/E) ratio has climbed to 40, back to levels last seen during the dot-com bubble. Yet the 12-month forward P/E ratio offers a more balanced perspective. At around 21, valuations look less stretched, because earnings expectations have risen sharply with share prices (see the chart below).

Median external forecasts also point to U.S. growth of about 3.5% – roughly 1.7 times its historical trend – reinforcing market expectations that AI could drive a growth breakout. Whether today’s valuations prove justified comes down to whether the earnings momentum can be sustained.

One essential nuance? Concluding that AI has become a bubble is itself a significant call: It assumes the technology will not generate a lasting breakout in productivity and growth. Previous technological revolutions did not deliver a lasting breakout in productivity and growth, but AI could prove different by creating new, durable sources of revenue.

The evidence so far has been supportive. Incremental margins remain above operating margins across most AI value-chain baskets, suggesting AI-related revenues are still translating into unusually strong profits. That reinforces our view that the investment cycle has further to run and supports our overweight to U.S. equities. While identifying the ultimate AI winners is difficult, we believe many will be found in the U.S. given its leadership in chips, frontier AI models, and deep capital markets.

An active approach to AI scarcity

Within that, we prefer expressing the AI theme through scarcity. We do not need to know which AI model or application ultimately wins to know that every AI system depends on chips, memory, power, and data center infrastructure. Companies supplying these scarce inputs benefit from sustained capital investment and, in many cases, long order books that provide greater visibility into future earnings. That makes scarcity one way to navigate uncertainty around earnings durability, and our highest-conviction AI investment idea.

The AI opportunity, however, extends well beyond today’s bottlenecks. As the buildout shifts toward physical AI, opportunities are emerging in robotics, sensors, and industrial automation, making active security selection increasingly important. China has advantages across parts of that value chain, including manufacturing and batteries. Yet manufacturing strength alone does not guarantee attractive equity returns, reinforcing our preference for active investing rather than broad regional calls.

We also see opportunities beyond today’s mega caps. Select small-cap companies, emerging market infrastructure providers, and industrial firms could offer attractive exposure to the scarce inputs powering the next phase of AI.

Our bottom line

We focus on companies best positioned to deliver a durable earnings breakout, expressing our AI conviction through scarcity while relying on an active approach to identify opportunities. We’re overweight U.S. equities on the AI theme.

Wei Li, Managing Director, is the Global Chief Investment Strategist at BlackRock Investment Institute at BlackRock Inc.

Jean Boivin, Managing Director, Head of the BlackRock Investment Institute Blackrock Investment Institute at BlackRock Inc., Vivek Paul, Global Head of Portfolio Research – BlackRock Investment Institute, and Beata Harasim, Senior Investment Strategist – BlackRock Investment Institute, contributed to this article.

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