Three ways investors are playing the AI trend — including one very contrarian view

Amid receding trade war concerns, AI is dominating Wall Street's focus, with Nvidia and Salesforce earnings being closely watched for insights into the sector's trajectory. Baird is bullish on Nvidia, expecting a boost to the broader 'AI trade', while Cleo Capital highlights potential tariff impacts on Nvidia's report. Main Street Research sees Salesforce as undervalued and anticipates this quarter may reveal the benefits of AI investments, while Essex Investment Management is advocating for small-cap stocks, citing undervaluation and AI's potential to democratize business for smaller companies, noting the Russell 2000's underperformance relative to the S&P 500.

Analysis

Artificial intelligence is the predominant theme on Wall Street, particularly as concerns over trade wars diminish, with upcoming earnings from Nvidia and Salesforce poised to offer critical insights into the sector's trajectory. For Nvidia, the options market anticipates a significant 7.5% post-earnings share price movement, reflecting high investor interest and uncertainty; while Baird maintains a bullish outlook, expecting the results to bolster the broader 'AI trade', Cleo Capital underscores the potential impact of tariffs on chip demand, suggesting customer pre-buying or cautious delays could significantly sway reported figures. Salesforce is also under scrutiny, with a consensus overweight rating and a price target suggesting approximately 30% upside; Main Street Research views the stock as undervalued at 24 times earnings and anticipates the current quarter might reveal tangible benefits from AI investments, addressing investor concerns about capital expenditure. Concurrently, Essex Investment Management presents a contrarian opportunity in small-cap stocks, highlighting their undervaluation relative to large caps and the potential for AI to democratize business operations, thereby accelerating earnings growth for smaller enterprises despite the Russell 2000's 6% year-to-date underperformance against the S&P 500.

Key Decisions for Investors

• Closely monitor Nvidia's upcoming earnings for indications of the AI narrative's strength and the tangible impact of tariff uncertainties on customer pre-buying behavior, particularly given the 7.5% implied volatility.
• For Salesforce, evaluate the earnings report for evidence of AI monetization offsetting capex concerns, which could validate the consensus overweight rating and the roughly 30% implied upside from its current price target.
• Consider exploring the small-cap segment, currently underperforming large caps, for undervalued opportunities, especially focusing on companies where AI adoption could significantly drive productivity and earnings growth, as suggested by Essex Investment Management.