Tech stocks, especially the Magnificent Seven, have provided strength S&P 500 over the past three years. And while investors flocked to some of these players earlier this year, that may have been short-lived. It is important to remember that the story of artificial intelligence (AI) that has driven gains in recent years is far from over. In fact, it may be starting as AI today makes its way from the research lab to real-world applications.
This year represents a pivotal moment in the story as major technology companies invest in infrastructure — not to meet anticipated demand, but rather to keep up with current customer obligations. Tech giants Amazon (NASDAQ: AMZN), Alphabets, Microsoftagain Meta Platforms plan to spend nearly $700 billion on this increase by 2026.
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Against this backdrop, my prediction is that AI infrastructure stocks will crush the S&P 500 this year. Let’s check the full story.
What is AI infrastructure?
We’ll start by talking about AI infrastructure. What exactly is it? It includes all the elements that make AI training and implementation possible, from chips to servers, network equipment, and complete data centers. The tech giants I mentioned above are infrastructure players, as is the chip giant Nvidia and network powerhouse Broadcom. And these are just a few examples.
Now, let’s consider what has happened so far in this AI boom. Over the past few years, investors have started to stock up on AI stocks as they see the potential of the technology. Used in a variety of ways and across industries and in our daily lives, AI can help companies and individuals save time and money — and be innovative. This is all good news for corporate earnings. The winners will be the companies that develop and sell AI, as well as those who use it, and investors aim to bet on these early players.
The early stages of AI involved the training of a variety of major languages, and infrastructure companies clearly benefited as customers flocked to them for chips, servers, and other products and services. This has helped companies like Nvidia and Broadcom report revenues that have exploded quarter after quarter.
A work in progress
But training is not a one-time event. It’s a work in progress, and on top of that, these newly trained models will be working on real-world problems. Here, they need chips, network equipment, and more to help them through the “thinking” process to be able to solve these problems.
As these models are used more often and in more complex and precise ways, companies will need other products and services provided by many infrastructure companies.
This whole program is starting to gain momentum right now. Amazon recently provided an example, as it talks about its spending plans — the company predicts spending 200 billion this year to fulfill the needs of Amazon Web Services (AWS) customers. AWS is the world’s largest cloud services provider, offering AI and non-AI products and services. The company says it aims to recoup this investment over the next two years, given current agreements with customers.
A message from the AI giants
Recent messages from chipmakers, telecommunications companies, and other data center giants have been consistent: The demand for AI capacity is growing. This suggests that these companies will continue to report strong growth in the coming quarters. And the reports we’ve seen so far this quarter support this view. Alphabet, Amazon, and Meta pushed S&P 500 earnings growth to more than 27%, which would be the highest rate since 2021, FactSet senior income analyst John Butters wrote in a May 4 note.
Meanwhile, Morningstar suggests AI shares are trading at their biggest discount in seven years, according to a CNBC report.
A look at several AI giants’ price to earnings ratios shows that valuations have indeed fallen.
Meanwhile, we are entering a new phase of AI growth: Today and in the future, companies are using AI, leading to strong revenue gains for infrastructure players. And infrastructure players’ heavy investment in capacity, based on customer commitments, suggests that this revenue opportunity will be huge.
This growth, along with attractive valuations, could drive investors into AI stocks — we’ve already seen that momentum in recent weeks — which is why my prediction is that these infrastructure players will crush the market in 2026.
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Adria Cimino has positions at Amazon and Oracle. The Motley Fool has positions in and recommends Alphabet, Amazon, Broadcom, Meta Platform, Microsoft, Nvidia, and Oracle. The Motley Fool has a policy of disclosure.
Prediction: AI Infrastructure Stocks Will Crush the S&P 500 by 2026 was first published by The Motley Fool.
