Where is the Value?
Submitted by Group W - Investment Management on January 16th, 2025U.S. equity markets have enjoyed more than two years of steady appreciation mainly due to a surge of investment in artificial intelligence (AI) infrastructure by tech behemoths such as Microsoft, Alphabet (Google), and Amazon. It has been a remarkable run, but can it last?
One thing is clear; the companies supplying the components that the behemoths use in their data centers are making a killing, and their surging stocks have been the primary contributors to the rise of the market averages. What is less clear is how all this investment in AI infrastructure will benefit the economy and society.
So far, the main beneficiaries have been the handful of companies producing the cutting-edge hardware that goes into AI data centers. However, hardware alone does not increase productivity or improve our standard of living. It remains to be seen when useful applications of AI will be developed and made widely available.
Some of the most promising applications for AI are in the field of medicine. The power of AI could greatly accelerate the development of new drugs and therapies. This bodes well for investors because the healthcare sector is currently one of the most favorably valued segments of the market. Healthcare stocks are trading at just 18 times 2025 expected earnings compared to 23 times for the overall stock market. Incidentally, the information technology sector is valued at more than 30 times 2025 earnings.
Expenditures on healthcare in the U.S. account for 18% of GDP, a percentage that is likely to grow as the median age of the population increases. With healthy dividend yields and strong resistance to recessions, healthcare stocks such as Medtronic, Novartis, and ICON are where the value is in the early days of 2025.
1 January 2025