AI has become the most powerful force shaping markets today, but the investment story is changing. While early gains rewarded broad exposure to the theme, the next phase will likely reward investors who can discern durable value from inflated expectations. That shift is already showing up in performance, with markets rewarding AI-linked companies that are turning adoption into earnings and leaving behind those still priced on promise.
Artificial intelligence is moving into mainstream adoption, but its investment potential depends on whether earnings can keep pace with expectations. Business usage is expanding quickly enough to suggest a hypergrowth phase, yet roughly 70% of the technology index’s value reflects anticipated future earnings growth. That leaves little room for disappointment if adoption, monetization, or profitability fall short.
The risk extends beyond technology stocks. Concentrated equity benchmarks and interconnected supply chains have spread AI exposure across regions and industries, including utilities, industrials, energy, and materials. A portfolio diversified by sector or geography today may still depend on continued AI spending to deliver performance, amplifying its sensitivity to shifting sentiment.
That puts the burden of proof on earnings. Investors increasingly want evidence of durable profits, improving margins, and free cash flow. Adoption surveys, token consumption and pricing, and returns on invested capital offer useful signals, while weakening pricing power or declining investment returns could pressure valuations before adoption reaches saturation.
Performance across AI-linked companies has already begun to diverge, and that dispersion strengthens the case for selectivity over broad exposure. Rigorous company analysis can distinguish lasting beneficiaries from temporary winners, identify businesses achieving productivity gains, and uncover opportunities created by indiscriminate selling. While active management can help navigate widening performance differences, true diversification today increasingly requires examining underlying earnings drivers rather than relying solely on traditional portfolio labels.
For more thoughts about the outlook for AI, please read
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return.
The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice.
Principal Asset Management leads global asset management at Principal.®
For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use only in other permitted jurisdictions as defined by local laws and regulations.
In Europe, this communication is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients.
© 2026, Principal Financial Services, Inc. Principal Asset ManagementSM is a trade name of Principal Global Investors, LLC. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc.
Don’t want to get these types of emails from us? You can manage your preferences or unsubscribe online.