AI’s Expanding Role in Energy Transition

Key Takeaways

• Much has been written about the power-hungry nature of AI to disrupt progress on corporate and national goals of energy transition. But the technology itself also offers potential opportunities to save perhaps even more energy and shift energy demand to locations where supply is abundant, evening out demand in grids around the world.
• AI also has the potential to address a growing number of challenges including energy, food, water, and waste management. Here the magnitude of the problem gives a sense of the scope of opportunity.

Potential Portfolio Implications

• Some of the Fed’s new economic projections were out of date on their first day of release. The bond market is still pricing in some probability of a Fed rate cut by September (65%) and one further step before year end. We think the probability of Fed easing is even higher.
• US stock/bond correlations have come down since the “Fed shock” of 2022. We continue to argue for intermediate-duration bond positions to lock in solid yields for longer than the Fed will remain tight. Global political developments also argue for allocations.
• For mega-tech players in the AI space, broader markets have already given abundant exposure for most portfolios, so we do not see the need to double down with a concentrated position. But the abundance of applications makes us more comfortable with the large positions that the wild market run-up has built in our portfolios. However, the potential opportunity to seek out specific companies applying AI-powered innovation to address challenges is compelling.