Investing Through The AI Cycle

August, 2026

The era of artificial intelligence (AI) has arrived. Chatbots that simulate human conversation are now widely available, allowing anyone to interact with AI through simple question-and-answer interfaces. Taking this technology a step further, AI agents are already capable of performing complex tasks autonomously, including multi-step workflows involving decision-making, problem-solving, digital actions, and interactions with external systems. AI is also being rapidly integrated into physical technologies such as robotics, transportation, manufacturing, and consumer wearables, dramatically expanding their capabilities. Meanwhile, the models that power AI continue to improve at a remarkable pace, driven by companies and researchers around the world. As a result, the prospect of artificial general intelligence (AGI)—AI capable of performing any intellectual task a human can—is no longer such a far-fetched concept.

These are exciting times for investors, even though we remain in the early stages of the AI revolution. While it is easy to envision many of the ways AI will reshape our lives and transform how businesses operate, it is still too early to identify the long-term winners and losers. The early internet provides a useful reminder: few would have predicted that Google would eclipse AltaVista and Yahoo or that Facebook would replace MySpace. History suggests that enormous wealth will likely be created over the coming decades by AI-focused companies, some of which may not even exist today.

What we do know is that unprecedented amounts of capital are being invested to build the data centers that power AI. The computing capacity required to train and operate today’s advanced AI models is immense. As AI becomes more capable and adoption continues to grow, demand for these “AI factories” will increase accordingly. AI providers are racing to stay ahead of that demand to avoid capacity constraints, disappointing customers, or leaving revenue opportunities untapped.

It is estimated that more than $1 trillion will be invested globally this year alone to construct and equip AI data centers. Many of the companies funding these projects have taken on substantial debt and issued tens of billions of dollars of new equity despite uncertainty surrounding future demand and investment returns. Spending could increase even further next year. Beyond that, however, the outlook is less certain. Financing is only one challenge. Data centers also require enormous amounts of electricity and water, while facing growing opposition from local communities. This pace of investment is unlikely to continue indefinitely and may prove to be heavily front-loaded, with several years of exceptional spending followed by a meaningful slowdown. In fact, there are already signs the industry may have gotten ahead of itself, as some operators have begun leasing excess computing resources after previously suffering from capacity constraints.

Given the difficulty of identifying the long-term AI leaders at this early stage, investors have largely gravitated toward companies benefiting from the AI infrastructure buildout. Suppliers of memory chips, semiconductors, networking equipment, servers, power generation, and cooling systems have experienced extraordinary stock price appreciation, contributing significantly to market index gains. Yet many of these businesses operate in cyclical industries with long histories of boom-and-bust cycles driven by temporary demand surges. At the same time, valuations for many of these companies have expanded dramatically, reflecting high expectations for future growth.

This narrow group of AI-related stocks has increasingly traded as a single cohort and has become notably more volatile. After their substantial advances, investor enthusiasm may be giving way to valuation concerns as prices appear increasingly stretched relative to the broader market. At the same time, many companies with little direct exposure to AI infrastructure spending have recently begun to outperform, particularly during periods when AI-related stocks have pulled back. Market leadership appears to be broadening to include fundamentally strong businesses whose growth is less dependent on data center construction.

Our investment approach remains focused on identifying long-term winners rather than attempting to time cyclical market movements. Many of the companies we own are already benefiting from AI or are helping enable its adoption. As a transformational technology, AI will create compelling investment opportunities for years to come, and we expect to participate in its continued growth and success.

Holger Berndt, CFA

[email protected]

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