AI stocks earnings growth set to slow sharply, Jefferies urges diversification

Earnings growth for global artificial intelligence (AI) stocks is expected to slow sharply over the next two years, prompting calls for investors to diversify beyond AI, according to a Jefferies report.

Earnings growth for global artificial intelligence (AI) stocks is expected to slow sharply over the next two years, prompting calls for investors to diversify beyond AI, according to a Jefferies report. The report said earnings growth for global AI stocks is expected to slow from around 100 per cent in 2026 to 30 per cent in 2027 and 22 per cent in 2028. The estimates are based on AI-related stocks in the MSCI AC World Index.

In comparison, earnings growth for global stocks outside AI is expected to ease from 16 per cent in 2026 to 9 per cent in both 2027 and 2028. The report also highlighted the difference in valuations between the two groups. Global AI stocks trade at 23 times forward earnings on an equal-weighted basis, compared with 13 times for stocks outside AI.

The report said investors should look beyond AI stocks as earnings growth is expected to slow and other sectors offer relatively lower valuations. The report said investors need to monitor credit spreads for signs that markets may become less willing to finance the ongoing AI capital expenditure boom.

It also noted that performance in emerging markets was broadening beyond AI in the second half of 2026. AI-related emerging market stocks had gained 81 per cent in the year to June, but their performance slowed significantly in the second half, while several sectors outside AI recorded strong returns. Jefferies said, "One thing is clear. The easy money has long since been made in the semiconductor stocks."

Concerns over the sustainability of AI investments have also increased, with credit spreads for companies involved in the AI infrastructure spending boom rising. The report said, "The Oracle and CoreWeave 5-year CDS spreads have surged from 186bp and 749bp respectively on 11 September to 288bp and 1,118bp."

It added, "These are the highest levels seen so far since the AI capex cycle got underway in early 2023." The yield on CoreWeave's bond maturing in 2032 had reached 14.8 per cent. It also highlighted the importance of major chipmakers in emerging market benchmarks, noting that TSMC, Samsung Electronics and SK Hynix together accounted for 28.5 per cent of the MSCI Emerging Markets benchmark.

The report outlined that it does not create a warm and fuzzy feeling when these companies come out with results more or less meeting expectations and the stocks sell off. (ANI)