Artificial Intelligence

How to Invest in AI Stocks As ‘True Impact’ Still Unknown Amid Hype

  • Lauren Goodwin says investors should keep in mind that AI’s eventual impact remains unknown.
  • She urged a sensible approach to investing in AI stocks. 
  • She said to invest thematically, focus on quality, and look at adjacent industries AI will rely on.

The frenzy around artificial-intelligence investing has played a big part in the S&P 500’s 12% rally so far this year.

Stocks like Nvidia and Microsoft — leaders in the AI space — have alone contributed to about 43% of the index’s gains. 

market breadth faangs 2023

LPL Financial

It is for good reason. Some expect AI to revolutionize the global economy and boost profit margins, and firms like Morgan Stanley and Goldman Sachs say AI could have more legs than “fads” like crypto and could boost the world’s GDP significantly.

But the size and scope of AI’s eventual role in society remains unknown, and investors should take a more cautious approach to the technology, especially as a recession looms, says Lauren Goodwin, economist and portfolio strategist at New York Life Investments. Goodwin sees a recession unfolding potentially later this year as the Federal Reserve’s rate hikes continue to work their way into the economy. She therefore sees a downturn in the broader stock market as likely.

“The excitement about generative AI has distracted investors from the possible risks of a looming recession,” Goodwin said in a note on Tuesday. “Artificial intelligence has been hyped as a game-changer, but its true impact is still uncertain.”

Nevertheless, Goodwin still sees the value in gaining exposure to the space. In the note, she shared three tips for investing in AI stocks in a sensible way. 

3 ways to invest in AI stocks sensibly

The first is to invest in the technology thematically and diversify your investment in the space across a number of stocks. 

“The direct winners from AI technology may not be known yet. A diversified or thematic approach is likely appropriate to give investors a potentially greater chance of success,” she said. “From a US value equity base, profitable tech may be an important add.”

Some exchange-traded funds that offer diversified exposure to AI include the First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT); the ROBO Global Artificial Intelligence ETF (THNQ); and the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO).

Second, she said to focus on quality companies with strong cash flows. Right now, that’s especially important as recessionary pressures creep up, she told Insider. 

“Investors looking to leverage AI trends should consider businesses – both large and small – that have demonstrated cash flow and quality, given the risks that would be inherent to lower quality or cash flow-negative companies in this late phase of the economic cycle,” she said in an email.

Finally, Goodwin recommended looking at industries that AI will rely on to scale up

“If you had known that the automobile would be a disruptive innovation, you may not have known which car companies would be the first winners, but you would have known that their success would require rubber for tires, roads, and other support infrastructure,” Goodwin said.

She continued: “We believe the same is true for the proliferation of the next generation of innovative technology, from 5G rollout to generative AI. Companies providing digital infrastructure, communications infrastructure, processing power, data centers, cyber security, and the materials to build each of these components are likely to be critical to the economy of the future.”

Investors can gain diversified exposure to the above industries through funds like the Global X Data Center REITs & Digital Infrastructure ETF (VPN); the WisdomTree Cloud Computing Fund (WCLD); and the Global X Cybersecurity ETF (BUG).