Sustainable Opportunities Funds update: Market Rally, Energy & Artificial Intelligence

While caution is warranted, the situation feels different to previous tech bubbles. The ten largest firms in the S&P 500 now make up 41% of the index, but they only generate 35% of its profits. This imbalance is notable, but not as severe as before. Current valuations are about half of what they were during the 1999–2000 tech bubble, suggesting that while tech stocks are expensive, they are not in “screaming bubble” territory. Strong earnings and profit growth continue, supported by robust private sector demand as well as government spending. Furthermore, in an environment of interest rate cuts, tech should perform well.

It is important to monitor corporate IT spending over the coming year to assess whether this growth is sustainable. Although we are not yet in bubble territory, the market is showing some warning signs, so a cautious approach is advisable. Another area of focus is the environmental impact of AI, particularly the rapid expansion of data centres needed for generative AI, which raises concerns about energy consumption and emissions. While the tech sector is leading in renewable energy contracts, most data centres still depend on fossil fuel-dominated grids. Investments in nuclear and innovative energy solutions are ongoing, but their effectiveness remains uncertain.

A key question is whether the emissions from AI infrastructure can be offset by the global emission reductions enabled by AI applications. The International Energy Agency projects that by 2035, AI-driven efficiencies in energy, logistics, and industry could outweigh the sector’s emissions footprint. For further details on the environmental impact of AI, please see our recent report by Senior Responsible Investment Analyst, Greg Kearney.

For investors, diversification remains crucial. The Sustainable Opportunities Funds are diversified both across sectors and within technology holdings, avoiding overexposure to any single chip vendor or AI provider. For example, in the semiconductor and equipment sub-sector, the Funds hold companies such as AMD, Nvidia, ASML, Infineon, Broadcom, and TSMC, with no single holding dominating the portfolio. This approach ensures we are not relying on one or two winners.