AI Will See Bigger Investments in 2025 Along With Regulations in US, China, Europe: UBS

The year 2024 ended strongly for the Artificial Intelligence space, with the rally powering the key index Nasdaq Composite to strong back-to-back return years. Global financial services firm UBS in a report dated January 2 answered key questions that matter for the AI rally in the New Year, while continuing to maintain its bullish stance on the AI theme.

It expects more spending from the Big 4, with its capex forecast to grow from $224 billion in 2024E to $280 billion in 2025E. Besides, it also sees more signs of AI monetisation. Here, Alphabet, Microsoft, Amazon, and Meta are referred to as Big 4.

"The big capex revisions by the Big 4 demonstrated their strong commitment to the structural AI growth story. The good news is we expect the upward revisions to continue in the near term...," the UBS report read. On the AI regulation front, UBS believes that with the new US administration, AI regulations would pick up in the US as well as in China and Europe.

“AI regulations have caught up in 2024, and more rules are set to be introduced in 2025. Regulations have always been, and will always be, a risk for the tech sector--more so for AI today, as we expect regulations to evolve quickly in the years ahead.” He urged market participants to be prepared for more AI regulations in 2025, but demand will also grow.

"Additionally, our recent checks suggest robust and improving demand from sovereign and enterprise AI customers, which should further broaden AI capex spending trends." Further, it also advised investors that they will need to be more nimble in 2025 amid rising regulations, potential product transitions, and tariff-related uncertainties.

The launch of ChatGPT at the end of 2022 reignited the structural outperformance in this space. With the AI rally now mature and adoption also rising, UBS believes it's a good time for investors to take stock of the state of the AI industry.
On revenues, UBS said revenue should continue to lag behind capex in 2025, but the gap should increasingly narrow over the years ahead.

It also put some light on what may drive volatility spikes in 2025. Investors need to be prepared for slightly more volatile returns in 2025, it added. 

"Admittedly, the easy gains in the AI trade are behind us," it argued. “This is based on our view that despite the structural trend, with the AI rally now more mature, any uncertainties around product cycles or tariff-related uncertainty could lead to some short-term profit taking by tactical investors and, hence, greater volatility.”

Investors should be prepared for more volatility in 2025 as growth rates start to gradually normalize, but they can take advantage of any corrections through structured strategies and buying the dip in quality AI stocks, it suggested.