In a recent report, Morgan Stanley took an in-depth look at the rapidly evolving landscape of AI integration and its impact on various sectors. The comprehensive study, an update to the study for Q4 2023, points out changes in AI exposure and importance across a wide range of stocks and provides a detailed map of AI's rate of change.
According to the survey results, 337 stocks representing more than $11 trillion in market capitalization changed their AI exposure category.
This includes a shift in exposure from categories such as “adopters” to “enablers.” For example, Morgan Stanley notes that AI is “now more important to 97% of utility coverage,” indicating substantial integration of AI technologies into the sector. This represents a dramatic increase from previous levels and reflects AI's expanding role in improving operational efficiencies and resolving power bottlenecks.
The study also noted that AI has significantly increased in importance to investment thesis, with 446 stocks representing $15 trillion seeing changes in this regard. The increased importance is due to AI's potential to provide operational efficiencies, productivity gains and innovative solutions across industries.
“AI is becoming more important to investment opportunities,” the company wrote.
Morgan Stanley emphasizes that measuring the rate of change in AI is crucial to identifying incremental alpha opportunities, and the firm's global mapping effort aims to provide a clearer understanding of these opportunities, even at this early stage of AI adoption.
The report identifies two main strategies for generating AI alpha.
1)'The growing importance of AI as an enabler: Stocks whose AI exposure has been reclassified as “core to theory” are up more than 25% year to date, and Morgan Stanley suggests investors should continue to focus on these enablers, as they represent a 20% upside to Morgan Stanley's base case target price, compared with just a 14% upside for stocks that are merely “core to theory.”
Among sectors, utilities, which have already delivered 15% alpha so far this year, are attracting attention for their potential for further upside.
2)'Adopters with strong pricing power': Companies classified as AI adopters with strong pricing power have outperformed companies with less pricing power by 24% since ChatGPT's release. Morgan Stanley expects this trend to continue, with 135 stocks that meet this criteria.
The report also details significant shifts in AI exposure and importance by sector. Utilities, Materials, and Industrials saw significant changes, with a significant number of companies reclassified as Enablers or Enabler/Adapters. For example, the number of utilities classified as Enablers has increased from approximately 3% to over 30% over the past six months.
Morgan Stanley predicts that productivity gains from AI will add roughly 30 basis points to net profits by 2025.
“Our unique industry group framework, which focuses on efficiency gains from AI, supports this view, with software/internet related groups cited as the biggest beneficiaries,” the report said.
“In terms of industry drivers of productivity gains, our framework highlights that service-oriented market segments hold greater opportunities for AI-driven efficiency gains,” it adds.
“These groups include software services, consumer services, medical equipment and services, financial services, and media and entertainment. These groups alone account for more than 30% of the S&P 500's projected net income for 2025, speaking to potential margin opportunities.”
