Wolfe expects continued AI spending growth to drive investment in 2H25

Wolfe Research maintains that AI spending will remain a key investment theme through H2 2025, projecting a 35% increase in Magnificent 7 capital spending for 2025. Amidst an economy expected to remain in a later cycle, the firm favors large-cap secular growth and defensive sectors like Staples and Utilities over earlier-cycle areas, dismissing recent growth stock underperformance as a temporary reversal. Wolfe anticipates AI-driven tech companies to deliver strong earnings, maintaining narrow market leadership, with the Magnificent 7 exhibiting superior 2025 EPS growth projections and minimal downward revisions.

Analysis

Wolfe Research reiterates a bullish stance on the artificial intelligence investment theme, projecting that Magnificent 7 capital expenditures will surge by 35% in 2025. This outlook is framed within a later-cycle economic environment, underscored by indicators such as a sub-50 ISM manufacturing index reading. Consequently, the firm advocates for a portfolio tilt towards large-cap secular growth stocks and defensive sectors like Staples and Utilities, while advising against exposure to early-cycle areas including transports, housing, and analog semiconductors, as well as value and small-cap stocks. Recent underperformance in the Nasdaq 100 and momentum stocks is dismissed as a temporary, technical reversal linked to quarter-end positioning, not a new bearish trend. Fundamentally, Wolfe anticipates AI-centric companies will lead the upcoming earnings season, reinforcing the current narrow market leadership. This view is supported by the observation that Magnificent 7 companies have the lowest downward EPS revisions for 2025 and are forecast to deliver EPS growth at more than double the rate of the median S&P 500 company.

Key Decisions for Investors

• Investors should consider maintaining an overweight position in large-cap technology stocks, particularly the Magnificent 7, given the strong outlook for AI-driven capital spending and superior earnings growth projections.
• To hedge against later-cycle economic risks, it may be prudent to balance growth exposure by adding positions in defensive sectors such as Consumer Staples and Utilities.
• Caution is advised for investments in cyclical sectors like transports and housing, along with value and small-cap stocks, which are positioned to underperform in the current economic environment.
• Short-term pullbacks in growth and momentum stocks should be viewed as potential buying opportunities rather than the start of a sustained downturn, based on the firm's analysis of market flows.