Thomas Hayes thinks investors watching the artificial intelligence sell-off may be looking in the wrong place for the market’s next big move. The founder and managing member of Great Hill Capital believes that within the next six months, a “monstrous bull market” will develop beneath the surface of the S&P 500. He contends that the mega-cap tech firms that drove the index to all-time highs won’t always be the winners. Rather, Hayes is placing bets on what he refers to as the “unmagnificent 493,” or the businesses that are not part of the small group of artificial intelligence behemoths that control the market-cap-weighted S&P 500. He contends that artificial intelligence is still relevant. The reason for this change is because the investment opportunity is evolving. Companies that spent billions building chips, models, and data centers captured the first stage of the boom. Hayes thinks the next stage could favor companies that use AI to cut costs, increase productivity, and widen profit margins, according to MarketWatch. Ordinary investors also need to understand the difference. If Hayes is correct, hundreds of companies below the S&P 500 index may start to perform much better while the index itself seems slow. It means the next stage of the bull market may vary greatly from the previous one. Hayes thinks the next AI winners will look different Wall Street used a very straightforward strategy for most of the artificial intelligence boom. Investors purchased businesses that sold the semiconductors, memory chips, cloud computing capacity, and data-center equipment needed to train and operate artificial intelligence. Hayes believes that part of the trade has become crowded. He contends that rising competition and massive capital expenditures may ultimately pressure the profits of businesses that provide AI infrastructure. Rather, he seeks exposure to companies that can enhance their current operations using more affordable AI models. Hayes told The David Lin Report that he is moving away from parts of the semiconductor trade while looking for opportunities in natural gas, logistics, telecommunications infrastructure, defensive sectors, and companies positioned to benefit from cheaper AI. To reap the benefits of artificial intelligence, a business does not have to develop the next cutting-edge AI model. It might automate customer service, streamline a warehouse, cut down on administrative tasks, or enhance inventory management by using an existing model. These savings have the potential to immediately increase profitability. “Those companies that are adopting AI… will absolutely gallop,” Hayes said. He gave several examples, including natural gas producer Comstock Resources (CRK), which could benefit from increasing electricity demand from data centers. He also highlighted logistics company GXO Logistics (GXO) and communications-infrastructure company Crown Castle (CCI), according to MarketWatch. Perhaps his most intriguing example is Alibaba (BABA). Hayes sees Alibaba as a cheaper way to gain exposure to artificial intelligence development in Asia. He also pointed to the company’s stakes in AI startups as another potential source of value. The main takeaway is that Hayes no longer views “AI stock” as being equivalent to “semiconductor stock.” This significantly broadens the pool of businesses that might profit from the technology for investors. A hedge fund manager bets AI users will beat AI builders. Yuichiro Chino / Getty Images The rotation away from Big Tech may already be starting Hayes observes indications that funding is already flowing into sectors that artificial intelligence dominated for a large portion of the year. Healthcare, utilities, consumer staples, and housing-related stocks are among the groups he has highlighted as investors look beyond the largest technology companies, according to MarketWatch. More Wall Street: Nvidia and Micron are about to lord their successes all over Wall Street Nvidia, Palantir, and Alphabet send waves through Wall Street Wall Street elites will pocket windfall from record $46 billion profits Recent trading gives that argument some support. Technology and communication-services stocks led market declines on Oct. 16 as concerns about AI spending and debt continued to weigh on investors. Utilities and energy stocks outperformed, while the Dow Jones Industrial Average managed a weekly gain, even as the S&P 500 and Nasdaq finished lower, Reuters reported. One session before, a similar movement occurred. Healthcare stocks led the S&P 500 on Oct. 15 as investors shunned AI. Lilly (LLY) and UnitedHealth Group (UNH) were among the large healthcare companies attracting buyers, while semiconductor stocks continued their losing streak, Reuters noted. That does not yet validate Hayes’s six-month forecast. Particularly if semiconductor firms release another batch of results that surpasses Wall Street estimates, sector rotations may swiftly reverse. However, the shift’s economic reasoning is now simpler to comprehend. There are currently non-stock options for investors. Hayes cited the yield on 10-year U.S. Treasuries at about 5.3%. When government bonds provide appealing yields, investors are less inclined to accept very high valuations based solely on a firm’s AI story. That puts additional pressure on expensive companies to prove that their enormous AI spending will eventually generate equally enormous cash flows. Businesses that use AI instead of funding its development have a distinct challenge: All they have to do is demonstrate how technology improves their operations. Hayes’ call could change how investors judge the AI boom Artificial intelligence is not necessary for Hayes’ forecast to come true. In fact, it may be the other way around. His argument will be most persuasive if AI becomes more accessible, affordable, and simple for regular businesses to use. The corporations who invested the most money in creating the technology may have less of an edge when it becomes more widely available. That would mark a significant shift in the cycle of AI investment. In the first phase, companies that sold limited processing power received rewards. In the future, businesses that figure out what to do with it could be rewarded. One of the most crucial indicators for investors will be if market breadth keeps getting better. The market would become less reliant on a few mega-cap technology firms if there was a surge in healthcare, industrials, consumer staples, utilities, financials, and smaller businesses. Additionally, investors who own broad-market funds would benefit from it. Due to the significant effect that its biggest businesses have on the index, a market-cap-weighted S&P 500 may conceal significant strength or weakness. While weakness in a few trillion-dollar corporations keeps the headline index largely unchanged, hundreds more equities may climb. Hayes thinks that’s precisely the kind of climate that may emerge. There are reasons to be cautious with the call. Artificial intelligence infrastructure companies are growing revenue, and upcoming earnings could boost semiconductor and data-center stocks. Reuters reported that investors will watch Meta Platforms (META), Tesla (TSLA), and major semiconductor companies for evidence that AI returns can keep pace with rapidly increasing capital spending. Still, Hayes is asking a useful question. Wall Street has spent years deciding which companies will build artificial intelligence. Investors may increasingly have to decide which companies will actually use it best. If Hayes is right, the next major AI winners may not look much like AI stocks at all. Related: ‘Big Short’ investors split over the AI risk that matters most
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