Last Year’s Investment Themes Are This Year’s Investment Themes

Only three weeks into the new year, the market finally got its footing at last heading into the long three-day weekend capped by the Presidential Inauguration. The year got off to a very rocky start, weighed down by fear of inflation reigniting and rising long-term Treasury yields that threaten to derail the Fed’s path to get the Fed Funds Rate down to 2.5% over the next year or two.

Last week, the equity market got a much-needed lift from lower inflation, retail sales and slightly higher-than-expected initial unemployment claims data. As the week closed out, the yield on the benchmark 10-year Treasury had fallen from 4.80% to 4.60%, giving investors confidence that the bond market was stabilizing, which in turn triggered a spring-loaded, three-day rally that took the S&P 500 back up to the 6,000 level.

Once the bulls got the all-clear sign from the bond market, last week’s three-day rally revealed where investment capital was immediately allocated to and provided investors the near-term road map of which themes, sectors and stocks will lead and outperform going forward. Quite frankly, the rally took place as most of the Magnificent Seven stocks traded laterally. This was a refreshing and defining moment in that the market started to broaden out with large fund flows ploughing into key stocks and ETFs that are the focus of key secular themes, which, to no surprise, were key themes in 2024 as well.

These themes begin with the continuation of massive capital investment into artificial intelligence that embraces the building of the stack and what is inside the rack, AI-centric infrastructure software and the AI application. This year will see the furthering of what is termed “physical AI” that applies to automation and robotics with the introduction of transformational humanoid technology taking on new roles.

According to IDC, in 2025, global spending on AI is projected to reach $337 billion. This includes investments in AI applications and infrastructure driven by the surging growth in adoption of AI across various industries, with a significant portion of the spending coming from enterprises embedding AI capabilities into their core business operations. Generative AI, in particular, is expected to see growth in spending to increase by 71% this year, reflecting the improving productivity among businesses.

The continuation of the building of data centers to power AI will experience significant growth in 2025. Increased demand for data center capacity has a global growth rate of around 15% annually to support the ever-increasing workloads. The hyperscale and colocation segments are anticipated to forge ahead with more than 10 GW of data center capacity already planned for 2025 according to JLL’s 2025 Global Data Center Outlook.

In 2025, more data centers will be under construction in the United States than ever before, according to a new forecast from real-estate services firm CBRE. The firm is expecting 4,750 data centers will be in the process of being built in primary markets, up from this year’s record of 4,250. For context, CBRE states “nearly as many data centers are currently being built as already exist in the United States. And much of that construction is already spoken for. Amid record-low vacancy rates, a record share of construction is being leased before it’s even finished.”

Rapid expansion of AI presents the ongoing challenge of power constraints and the need for innovative solutions to meet the growing energy demands. The U.S. Department of Energy (DOE) projects that the transmission system will need to double in size between 2020 and 2050. To do so involves adding approximately 7.1 gigawatts of capacity and nearly 1,000 miles of power lines across multiple states.

The year ahead will see business for engineering and construction companies flourish as the U.S. power grid is expected to undergo significant expansion. And while there is a lot of attention being paid to nuclear power, meeting the near-term demand for delivering vastly more electricity will involve the expanded use of solar and wind power generation with natural gas providing the greatest amount of capacity.

Source: U.S. Energy Information Administration

JLL pointed to the growth prospects surrounding small modular reactors (SMRs) that are the subject of a lot of investor buzz. SMRs offer a more scalable approach to green power, although deployment of this technology is still in the initial stages. Regulatory pushback at the federal, state and local level is a substantial hurdle. Public perception of nuclear risks will always be at the forefront of where to locate SMRs. Most likely, rural areas will be selected as part of large AI developments.

These are the big three themes that are in their own stealth bull markets because this is where the greatest amount of investment capital is flowing to. Cybersecurity will also be on the receiving end of heavy corporate spending given the rising number of sophisticated cyberattacks on large enterprises and governments.

Another theme of focus is that of the “experiential economy” that plays well for travel and tourism, live music festivals, exclusive experiences, thrilling outdoor activities, culinary schools, fitness and wellness retreats and arts and cultural experiences. And there are other themes within health care, retail, precious metals, cryptocurrencies, natural disaster remediation, online gaming, private equity, fintech, etc. But without trying to be too clever, investors should consider following the big money, as it invariably leads to where the most consistent and best performing assets can be found.