Increase in Capital Spending May Provide an Unusual Investment Opportunity

The pace of growth and investment in the artificial intelligence (AI) space is increasing rapidly and it shows no sign of letting up. For investors, the AI segment of the technology market provides several points of entry that offer the potential for healthy long-term gains.

While the tech market and AI in particular, can be volatile, this sector has benefited from the growing use of AI across a broad range of industries over time. Even conservative investors who have not yet entered this market are likely to find opportunities that fit their goals and risk tolerance.

What is AI?

“AI” refers to computer systems capable of performing tasks that are typically associated with human intelligence, utilizing reasoning, problem-solving and decision-making. It differs from traditional computer programming, which follows fixed instructions, in that AI has the ability to learn, adapt and make decisions based on the data it processes.

Use of AI has surged in recent years as AI applications have become more embedded in everyday life. Meta reports that Meta AI had 1 billion active users in 2025, a figure that is expected to increase by 20% in 2025.

To create a more personal, more valuable online experience, AI is powering the algorithms that determine what shows up in your Facebook and Instagram feeds, as well as the movies ‘we think you’ll like’ in your Netflix menu. In the healthcare market, AI is being used for diagnostics and research to quickly and accurately evaluate CT scans, PET scans, x-rays and blood samples. In manufacturing, it is used in the production and quality control processes. And anyone who uses search engines on a computer or cell phone is already using AI.

AI-related capital expenditures by technology companies such as Microsoft, Alphabet (Google), Meta (Facebook) and Amazon reached nearly $200 billion in 2024, accounting for more than 20% of total capital expenditures among companies in the S&P 500 Index. All four of these specific companies have announced they expect increased spending on AI infrastructure, specifically data centers, to secure their long-term position in the AI space and meet the growing computing demands of the future. Another major AI hardware manufacturer, Taiwan Semiconductor Manufacturing Company, announced recently it would commit $160 billion to building U.S.-based facilities.

Points of Entry for Investors

As with many market sectors, there are several ways for investors to get in the door.

  • Index funds – Many of us are already familiar with the concept of buying a broad index, such as the S&P 500 or the NASDAQ index in our portfolios. Attractive to investors because of ease of purchase and low costs, buying a broad index can be a great way to participate in the AI space. In the large, U.S. stock sector, the tech-heavy NASDAQ could be a great solution for investors looking for exposure in their core portfolios.
  • Exchange-traded funds (ETFs) – ETFs often provide even more targeted investment opportunities for portfolio holdings.     A simple way to buy a basket of similar stocks with a particular ‘flavor’ that trades like a single stock, the universe of tech and AI ETF offerings is growing every year. For those looking for an AI and tech overweight in their growth-focused investments an AI ETF gives you exposure to these companies without having to identify individual stocks.
  • Individual stocks – Investors sometimes like to enter a new market sector by purchasing shares of a specific company with which they are familiar, and the tech market – specifically the AI sector – offers many such stocks. A few years ago, NVIDIA was unknown to most people, but today it’s practically a household name. Given its more than 1400% stock appreciation over the past five years, that’s no surprise. NVIDIA and six other companies – Microsoft, Alphabet, Meta, Amazon, Tesla and Apple – comprise the so-called “Magnificent Seven” companies at the top of the AI market. Generally, individual companies that draw investment for their AI activities are chip producers or those using AI in some facet of their customer experience. Depending on your personal preference, you can choose to focus on the chip makers, software developers, cybersecurity, cloud computing or internet retail.  As always with individual stock purchases, be sure to do appropriate due diligence.

Investing at the Edges

An emerging strategy for investing in the AI sector doesn’t involve buying AI stocks or funds, but it may provide strong returns by investing in the data centers that will be built to support the AI boom and the massive amounts of energy used to power them.

Much of the estimated $1 trillion in capital expenditures that tech companies are expected to invest in over the next four years will go to build new data centers. An AI data center is a facility that houses the IT infrastructure needed to train, deploy and deliver AI applications and services. Data centers are big and getting bigger. The largest in the U.S. is The Citadel Campus in Nevada, clocking in at 7.7 million square feet.

  • Data centers – Building data centers requires construction companies that are highly specialized and that possess the capacity to build complex facilities fast. Investing in these specialized construction companies is more of a real estate play than technology investment, but it is one that leverages the growth and opportunity presented by the AI sector. For investors with commercial real estate interests, such investments also could provide unique opportunities for tax-advantaged 1031 exchanges.
  • Utilities that power data centers – Similarly, investments in utility companies that provide power to AI data centers may offer a new way to transform a traditionally staid investment into a faster-growing opportunity. Data centers use huge amounts of power, and S. data center power demand is expected to more than double from 35 GW to 78 GW by 2035.

Managing Risk

As with any investment, especially in a rapidly growing market, managing risk requires diligent research and attention to risk tolerance.

One of the biggest factors to consider in AI investing is the high price-to-earnings (P/E) ratio of AI companies. On average, it’s much higher than other sectors in the stock universe, driving up share prices. The question is, are AI stocks overvalued? In many cases, they’re not overvalued when the growth potential is considered.

Additionally, market volatility is significant in the AI sector. Merger and acquisition activity has been light recently, but it may pick up, despite the staggering dollar amounts these companies are selling for.

Market corrections are another reality in a volatile sector. In April 2025, the AI sector experienced a 20% correction, driven in part by concern over tariffs, but the sector had just come off a 20% growth spurt in 2023 and 2024, so some pullback was predicted as portfolios were readjusted. The downside impact on stock prices has been absorbed now, but future corrections are always a possibility.

Buying shares of individual companies or overweighting a certain sector also increases risk, and the best way to avoid this is to buy a broad index. Even if you want to go all in on a stock like NVIDIA, remember that if you own broad index funds or ETFs or certain mutual funds, you most likely already own NVIDIA shares.

Questions?

AI is here to stay. Look at our usage of cell phones today and how integral it is to everyday life. Over the next decade, we will likely see AI become so integrated into the technology that drives our modern lifestyle, it will power nearly every device or machine we touch. Now is the time to capitalize on that trend by investing in the right AI technologies.

If you would like to discuss adding AI investments to your portfolio, contact an Adams Brown Wealth Consultant.