In early 2025, DeepSeek’s artificial intelligence (AI) model breakthrough sparked investor doubts about the sustainability of the huge sums of money being spent on compute.
However, a series of spending commitments from big tech companies, sovereign AI customers and so-called “neocloud” firms has quelled these concerns for now.
Looking ahead, strategists at the UBS Global Wealth Management Chief Investment Office argue that beyond this year, spending on AI compute will broaden out and grow 20% annually.
“We don’t think we are anywhere close to peak AI compute spending in absolute terms,” they said.
“However, our study suggests 2025 may mark a relative near-term peak for AI compute as a percentage of AI capex spending, as we see AI spending broadening into other segments like memory, networking, and industrial AI capex.”
They expect “more normalised spending growth” on AI compute in the next five years, estimating 20% compound annual growth rate (CAGR) versus the 120% CAGR seen over the last two years.
Investors should therefore take a more balanced and diversified approach to portfolio positioning when it comes to investing in AI, as capital expenditure broadens out, according to the strategists.
They expect segments such as high-bandwidth memory, networking as well as industrial solutions such as power and liquid cooling to benefit from this broadening out of AI spend.
They said: “We also see performance improvements beyond Moore’s Law (i.e., adding more transistors per chip) and through integration/partnership with other segments like memory, networking, and techniques like advanced packaging.”
The strategists also highlighted the tech sector’s recent 25% rally from the April lows as “strikingly similar” to the tariff-related correction and subsequent rebound in 2018-2019.
“Lessons from history also suggest a consolidation after 20-30% gains in a short period of time is not unusual, with some profit-taking in high-beta or cyclical stocks,” they said.
With this market backdrop, they recommend a balanced exposure within tech, having recently trimmed allocations to strong performing stocks in cyclical segments and added exposure to laggards and software names.
“Given our view that tech volatility should rise in the near term, investors could also consider taking advantage of structured strategies in this volatile environment,” they added.
