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The Macro Brief – The AI effect
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Shiva Joon, Data Scientist, and Duncan Toms, Multi-Asset Strategist, look at how artificial intelligence is helping to drive the stellar performance of many US companies.
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Transcript
Introduction to HSBC Global Viewpoint
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Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Impact of AI on U.S. Companies' Earnings
00:00:28
Speaker
Hello, I'm P.S. Bartle in London, and welcome to the Macro Brief from HSBC Global Investment Research, the podcast that looks at the issues driving financial markets across the globe. In today's episode, we're answering questions about artificial intelligence and how much it is driving the stellar performance of many U.S. companies.
00:00:45
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The biggest U.S. companies in the S&P 500 index are on course to deliver another quarter of double-digit earnings growth. A significant factor contributing to this success is artificial intelligence.
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So just how are companies using AI? And what can European companies learn from their American counterparts?
AI Sentiment Analysis Methodology
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To discuss this, I'm joined by Shiva Jun, data scientist. And making his debut on the Macrobrief is Duncan Tom's multi-asset strategist.
00:01:10
Speaker
Jun and Duncan, welcome. Thank you. Good to be here. Right, June, can we start with you? There's so much noise about AI, it's hard sometimes to separate the hype from reality. Thankfully, you've been looking at the data, specifically what companies have been saying in their results. This is part of your Listen Up series. Tell us about that.
00:01:30
Speaker
Yeah, sure. so um So we use natural language processing and more modern AI tools as well to sift through company results and see what management is discussing more frequently, what's been the topic of the season, so to speak, and also what's the sentiment when they discuss themes like guidance, revenue, earnings, um and and also more importantly, what are they discussing when they're discussing AI.
Global Scale of AI Sentiment Analysis
00:01:53
Speaker
So just for our listeners, just give us a sense of the scale of what you're doing here. Is it it all company statements that you're kind of using the large language modules to kind of read through and interpret? So yeah, I think our database of companies is actually quite massive now. So globally,
00:02:08
Speaker
it's about 13,000 different companies. In the US it's a big combination of both large caps, mid caps and small caps. So ah we managed to cast a wide net and get really good insights about what the management are discussing across different sectors and across different regions.
00:02:23
Speaker
So you use a proprietary AI-powered tool, so AI and everything, to analyze sentiment.
Positive AI Sentiment in U.S. Sectors
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What is that telling you? Where are the biggest areas of improvement and is it in fact just concentrated on the mega caps?
00:02:36
Speaker
Yeah, nothing like using AI to tell us what AI is doing. But um yeah, I think we have our own proprietary sentiment model. um And it utilizes most, both latest ah generation of AI tools and also previous generation of AI tools. And using both of these different techniques, ah we find the sentiment in the US when management discusses forward-looking statements is both positive and it's actually improving quarter on quarter.
00:03:01
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um In our experiments, we find the companies which discuss positively about the future generally perform better after the results date. um And this measure is particularly positive for companies in the healthcare sector, the tech sector and the real estate sector ah in the US.
00:03:18
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We also kind of wanted to answer the question, is that tailwind just particularly about mega caps? Because you see that all the headlines about, you know, there's a Mac seven and what have you. But it sounds like it's a bit more widespread than that. It is indeed. It is across sectors. So we ah separated the two tails of companies in S&P 500, so to speak. So the top 25 and the bottom
AI Enablement Boosts Smaller U.S. Companies
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100. And then we applied these techniques on both both of these basket of stocks. And we see the sentiment improving in both of these baskets.
00:03:49
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ah particularly improving greatly in the bottom 100 basket currently. And the key driver there is the tailwind these companies are getting from AI infrastructure and AI enablement practices across US.
00:04:01
Speaker
So we see a lot of companies discussing tailwinds due to ah ah providing power to different data centers, ah different technology in terms of small tech-based technologies from different companies in the US, ah but also cooling technology for the big infrastructure projects that we are seeing are happening. across across the country.
00:04:21
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Duncan, let's let's turn to you. You've got your hand up, so you obviously want to make a comment. Do
Comparing AI Sentiment: Europe vs U.S.
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you want to do that now? Yeah, i was just I was just going to ask you quickly, in terms of Europe, how sentiment's developing there versus the US. So, Europe, the sentiment is also positive, but muted. So, you can clearly see the US companies are kind of leading that sentiment improvement. And um I think the key here, I guess, you can perhaps talk a little bit more about is the disparity you've seen in in yeah adoption.
00:04:49
Speaker
amongst European and American companies. Indeed, your your work seems to have identified that Europe's been a bit more cautious about ai adoption. Why is that? Yeah, exactly that. I mean, it's a good question as to why. I think there's a kind of broad skepticism out there, um or there was a broad skepticism i'm worried about the risks of AI? Perhaps a little bit. Is this more to do with regulation, than they want regulations in place first?
00:05:12
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I think maybe a little bit is around more a more cautious approach with regard to a more regulated environment
AI's Growing Importance in Europe
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in Europe. i mean, we've certainly seen that um in terms of concerns over data use, privacy concerns, et cetera.
00:05:24
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ah Maybe that links a little bit to to GDPR here in Europe. i mean, we've seen Draghi speak about that and how that links to the whole AI backdrop. um But what we did earlier this year is have a look at what company management are speaking about with AI in Europe versus the US.
00:05:39
Speaker
And the number one word was cost. So that gave you a flavor of why it was a little bit slower. And this really leads on to AI adoption, where in Europe we see a much lower AI adoption rate than out in the US. But do you think that's going to change?
00:05:53
Speaker
Yes, I think it could change. I mean, when we again come back to those earnings called transcripts and look at ah what European companies are talking about with AI versus the US now, they're talking about terms like important, invest, strategic.
00:06:08
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So it's clear that company management are realizing the gravity of the moment here. And that's very much needed to keep up with not only their US counterparts, but in terms of other companies within Europe that have adopted AI, because we see very specific examples of companies talking about cost savings and efficiency gains, particularly efficiency gains in a wide range, but kind of 20%, 30%, 90%, even one case, 20 times productivity increase.
00:06:31
Speaker
That's enormous. 20 times. yeah. ah annoyeded twenty times yeah So there's a wide range of using ai and how that can improve businesses.
00:06:42
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And it's clear that Europe is is starting to get on board and realize how important that moment is. And just to both of you in your work, what's reading it, what's apparent is the market is beginning to reward those companies who are demonstrating
AI-Driven Market Outperformance
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AI adoption. I mean, the outperformance is clear, isn't it?
00:06:59
Speaker
Yes, certainly. So um again, using our analysis on earnings transcripts, we can find these companies which are discussing adoption of AI quite frequently and put them into a basket of stocks.
00:07:10
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And we do see that in the US particularly, um that ah basket of ai companies tend to outperform the broader market. um Even then, when we remove the tech-based companies so that making sure we there's no bias in there and Mach 7 companies, that basket still outperforms the broader market. So there's clearly a big tailwind in terms of generating revenue when companies start adopting these techniques.
00:07:33
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um ah The question I have for Duncan is, and in what's the what's the sector difference in in in Europe in terms
AI Adoption Across Industries
00:07:40
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of AI adoption? Are we seeing a particular sector adopting it more so than the others? That's right. There's some quite big divergences, aren't there?
00:07:46
Speaker
Yeah, I mean, unsurprisingly, tech has one of the highest adoption rates, which is very similar to what we see in the US. um But we also see financials and communication services standing out as having higher adoption rates, which might sound a little bit surprising, but that's both sides of the Atlantic.
00:08:03
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um So clearly what we're seeing is a broad adoption across different sectors and those sectors stand out. But what's very clear in the specific examples among company management and the way they're talking about it is just how wide a wide number of use cases there are, right?
00:08:21
Speaker
So in certain sectors, you're seeing Gen.AI being used to explore molecules for hair hair products, or in other sectors, you're seeing it say in energy to reduce ah well planning time for drilling for oil, for example. So there's a wide variety of use cases and how companies are using this most effectively will generate very strong winners and potentially some that are left behind as well.
Investor Enthusiasm for AI
00:08:44
Speaker
So coming back to this market outperformance point, it hasn't happened in Europe yet. no yeah Not yet, not yet. Perhaps some of that is the lower AI adoption rate. So in Europe, we see an adoption rate of roughly half of that in the US at 25%.
00:08:59
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So much lower. So maybe as we see more AI adoption going into 2026, that outperformance might start to come through. And that's something we're really hoping for. That's the title your Europe may have its AI moment.
00:09:11
Speaker
Yes, exactly that. It's missing it for the moment, but we're hoping that it will be coming. June, this analysis is all based on public statements by quoted companies, but you also look at the private sector through your Funding the Future survey, which in essence is looking at what's happening more upstream in the private sector. What did the latest survey reveal?
00:09:33
Speaker
Yeah, I think the latest survey, the title of the survey is Bulls on Parade. um And it's because the the investor sentiment in the private market has improved substantially in the most recent wave. And um invest I think 74% of investors are expecting private market to activity to increase over the next year.
00:09:51
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And the key tailwind decided for that um is its enthusiasm around AI amongst investors. and And that is ah really important part for us because, as we've seen throughout history, whatever occurs in the private market generally has a good lead on effect of what's to come in the public market as well.
Rapid AI Adoption Compared to Past Technologies
00:10:11
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ah We are already seeing, as Duncan mentioned, an adoption rate in the U.S. of about 50% within public companies. As we are seeing private companies and private investors becoming more excited about newer technologies and the new future, i think that adoption rate should just increase um and in in the coming months. and years.
00:10:29
Speaker
So to finish on, and this is something that came out in the survey, that the top AI tailwind was the speed of change in tech. If you think about the internet, it took a few years after the all the hype ah before the benefits became mainstream.
00:10:46
Speaker
Is that pace of adoption that we're sort of living through with the eye going to be quicker? It sounds likely. but is it also in a way already accelerating compared to say even a year ago?
00:10:58
Speaker
um might have been a bit too young to remember the early days of internet, ah but um I think the adoption rate certainly is very impressive in terms of AI. i think in the US, I'll talk about US and then i think specific to that, we were we've seen just through this year where management, not only are they discussing generative AI, ah which was a big thing in the new technology, but they are now actively discussing agentic AI and applications of agentic e-commerce. So what is agentic AI for our listeners? Agentic AI, i would say, i would describe, and I might be, you know, it's like people won't like it, but I like to describe it the way is using AI technology with a lot of scaffolding around it so that you're actively using it to do a wider group of tasks.
00:11:40
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ah So you're not just using an AI a tool in terms of a chatbot or retrieving information from a document. You're trying to use it to create a pipeline and a working space, so to speak, using lots of scaffolding and software engineering.
00:11:54
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And companies are actively discussing about using that in the earnings calls, whether for their cost ah savings, for their margin improvement, um or you're seeing a lot of companies actually utilizing to reduce their advertising revenue by utilizing some of these new AI models that have been released from OpenAI. So so so the the adoption rate has certainly been interesting.
00:12:17
Speaker
I think it will continue on that pace in the near term. Coming back to your question on adoption there, Piers, I mean, one of the things we've seen from the St. Louis Fed is that they have found that in the three years after the first mass market product, Gen.AI adoption has outpaced both PCs and the internet.
00:12:33
Speaker
yeah So on that metric, you're seeing this very much accelerated adoption. And this is something we think is going to be a huge tailwind for 2026. Jun? june I'll point out one anecdotal evidence there in terms of the return on AI investments as well.
Microsoft's AI Revenue Growth
00:12:46
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So Microsoft now um discloses AI revenues under their earnings. It's as a line item under Azure results in the results.
00:12:57
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um And you can see from there, it took Microsoft about six years to break the 10 billion mark in revenue from Azure and cloud services. For AI um investments in AI products, it took them three years.
00:13:12
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So it's clearly, it's taken them half the time to reach that 10 billion mark. so So that kind of gives a good insight into how how companies are able to perhaps monetize these AI technologies much quicker than the previous generation of technologies that we saw.
00:13:28
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I feel the need for speed, I guess, is the is the statement to to close that one. Very interesting comments from you both. Thank you for joining. And I'm sure we will have you back soon. Brilliant. Thank you. Thank you for having us.
00:13:42
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Before we go, don't forget to check out our sister podcast, Under the Banyan Tree, where hosts Fred Newman and Harold van der Linde put Asian markets and economics into context. And a reminder that clients can keep up to date with our latest research with our mobile app.
00:13:57
Speaker
Head to Apple's App Store or Google Play to download it. And finally, if you have any questions or comments, you can get in touch with us at artsresearch at hsbc.com. So that's all we've got time for on today's Macro Brief, hosted by me, Pierce Butler, and produced by Tom Barton.
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Thanks for listening, and please join us again next week.
00:14:47
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.