How to invest in AI amid AI spending worries?

Investing.com -- Investors should spread their artificial intelligence exposure beyond a handful of technology giants as mounting capital expenditure raises questions about returns, according to UBS strategist Matthew Carter, who remains positive on AI’s contribution to global equities in 2027.

The latest technology selloff reflects growing scrutiny of how companies fund AI infrastructure and whether investment translates into revenue, profits and cash flow. Some technology groups reported negative quarterly free cash flow, and indebted computing providers faced pressure over financing risks.

Still, strong cloud growth and demand for computing capacity prompted the bank to raise its aggregate AI capital spending forecasts to $1 trillion in 2026, $1.4 trillion in 2027 and $1.5 trillion in 2028.

The spending outlook favors companies with healthy balance sheets, pricing power and established customer demand rather than businesses dependent on borrowing or consistently high infrastructure utilization.

Investors should begin by reviewing portfolio concentration, particularly after years of gains in leading technology shares. Excessive exposure to individual companies leaves portfolios vulnerable to earnings disappointments, regulatory changes and shifts in market expectations.

A broader AI allocation can include semiconductor manufacturers, cloud providers, software developers, electricity and cooling suppliers, grid operators and companies helping businesses adopt AI. Select semiconductor, computing and power businesses offer opportunities, particularly where valuations remain reasonable.

Geographic diversification also matters. Asian companies supply memory chips and semiconductor components, and European industrial groups stand to benefit from electrification, automation and data center construction.

Outside technology, the preferred equity sectors include industrials, health care and financials, with the Eurozone, emerging markets and Asia excluding Japan favored regionally.

Investors seeking downside protection could examine capital preservation structures, though protection depends on issuer solvency and may apply only at maturity. Reverse convertibles can generate coupon income during volatile markets but expose holders to substantial losses if underlying shares decline.

Both approaches carry pricing, liquidity, and issuer risks, making position sizing and risk tolerance critical.