Podcast Summary: "Finding Opportunity in AI’s Evolution"

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Finding Opportunity in AI’s Evolution
• Release Date: January 14, 2025

Introduction

In the episode titled "Finding Opportunity in AI’s Evolution," Morgan Stanley’s Ed Stanley, the global Head of Thematic Research, delves into the rapid advancements in artificial intelligence (AI) and their implications for the financial markets. Released on January 14, 2025, this episode provides a comprehensive analysis of how AI's evolving capabilities present substantial investment opportunities.

Understanding AI’s Rate of Change

Ed Stanley opens the discussion by emphasizing the transformative pace at which AI technology is advancing. He states, “Even if you haven't been using artificial intelligence in your work or home life yet, you'll doubtless have heard about its capabilities by now” (00:30). Stanley illustrates the evolution from simple task automation to more complex, multi-stage processes where AI systems not only execute tasks but also plan and generate comprehensive outputs autonomously.

Introduction to Edgentic AI

Stanley introduces the concept of Edgentic AI, describing it as the next phase in AI’s development where software programs gain agency. “That is an example of edgentic AI. As the name implies, this next phase of AI development is where software programs gain agency transitioning from reactive chatbots that we've been using into proactive task fulfillment agents” (01:10). This evolution marks a shift from AI as a mere tool to AI as active participants in workflows, capable of initiating and managing complex projects.

The Transition to Proactive AI Agents

Over the past three years, AI models have significantly enhanced their capabilities. Stanley notes, “Over the past 36 months we've gone from reliable output that can displace or supplement 5 second or 5 minute tasks such as translation or quick summaries to models that are providing reliable output for 15 minute tasks, one hour tasks” (01:45). This leap reinvigorates potential skepticism regarding AI's return on investment. However, Stanley counters this by highlighting unexpected advancements: “The AI research labs managed to take another leap forward, surprising even seasoned analysts” (02:00).

AI’s Impact on Investment and Market Performance

Stanley underscores the significance of AI adoption in driving market outperformance. “AI adopted companies that can leverage these agents will start to pull ahead of their peers” (02:30). He emphasizes the importance of tracking AI's integration into companies' investment theses, citing data from Morgan Stanley’s AI mapping surveys. The latest survey indicates that 585 out of 3,700 global stocks have seen their AI exposure or materiality adjusted, affecting approximately $14 trillion in global market capitalization.

Rate of Change as a Performance Indicator

A critical metric discussed is the rate of change in AI adoption. Stanley explains, “This rate of change in AI isn't just a buzzword, it's a tangible metric driving outperformance” (03:00). Historical data supports this assertion: stocks with upgraded AI exposure and materiality outperformed the broader equity markets by over 20% in the second half of 2024. Stanley projects that similar outperformance will continue, particularly among stocks where AI integration has been recently enhanced.

Key Findings from the AI Mapping Survey

Stanley outlines three primary conclusions from the latest AI mapping survey:

1. AI Enabler Stocks with Rising Materiality:

   • Initial leaders in AI, such as semiconductor companies, might soon see the software sector take the forefront in market dominance.
   • “Semiconductors which have outperformed well might soon pass the baton to the software layer in terms of equity market dominance” (03:30).

2. Adopters with Pricing Power:

   • Companies that integrate AI early can sustainably expand their margins without needing to lower prices for customers.
   • “These are companies that adopt AI early and use it to expand their margins, but sustainably without having to give it back to their customers” (03:45).

3. Financial Stocks:

   • The financial sector has exhibited the fastest rate of AI change, leading to significant efficiency gains and potential share price growth.
   • “Financial stocks in particular, where AI rate of change has been the fastest of any sector in our global coverage in terms of the efficiency gains that we think it can manifest for the share prices” (04:10).

Investment Implications and Future Outlook

Looking ahead, Stanley is optimistic about the advancements in AI throughout 2025. He posits that companies effectively leveraging AI agents will outperform their counterparts, making AI integration a critical factor in investment decisions. “Tracking AI's evolution in the materiality of companies investment cases we think, has never been more important” (02:20). Morgan Stanley remains committed to monitoring these developments to provide timely insights and updates to investors.

Conclusion

Ed Stanley concludes by reaffirming the pivotal role of AI in shaping market dynamics and investment opportunities. As AI continues to evolve rapidly, staying informed about its integration across various sectors is essential for capitalizing on potential alpha generation. Morgan Stanley positions itself as a key resource in navigating these changes, ensuring that investors remain ahead in the fast-paced landscape of AI-driven markets.

Notable Quotes:

• “Even if you haven't been using artificial intelligence in your work or home life yet, you'll doubtless have heard about its capabilities by now.” – Ed Stanley (00:30)
• “That is an example of edgentic AI. As the name implies, this next phase of AI development is where software programs gain agency transitioning from reactive chatbots that we've been using into proactive task fulfillment agents.” – Ed Stanley (01:10)
• “AI adopted companies that can leverage these agents will start to pull ahead of their peers.” – Ed Stanley (02:30)
• “This rate of change in AI isn't just a buzzword, it's a tangible metric driving outperformance.” – Ed Stanley (03:00)

For more insights and detailed analyses, listen to the full episode of "Thoughts on the Market" by Morgan Stanley.

Time Stamps

• 00:30 – Awareness of AI capabilities
• 01:10 – Introduction to Edgentic AI
• 01:45 – Transition to proactive AI agents
• 02:00 – AI research advancements
• 02:20 – Importance of tracking AI evolution
• 02:30 – AI adoption and market outperformance
• 03:00 – Rate of change as a performance metric
• 03:30 – AI enabler stocks and market dominance
• 03:45 – Adopters with pricing power
• 04:10 – AI's impact on financial stocks