Phil Palumbo on the Next Phase of the AI Trade and Market Outlook for 2026

Economic Outlook and Market Broadening

• 📈 The overall economy and corporate earnings are expected to see another up year, driven by the Fed cutting rates.
• 💡 Lower interest rates will benefit a broader range of companies beyond just tech.
• 🚀 Many companies are expected to integrate AI into their operations, leading to increased productivity and earnings.

AI's Impact on Earnings and Productivity

• ⚡ The impact of AI on earnings, particularly higher margins, is already being observed in companies like Salesforce.
• ⚠️ Despite concerns about AI disrupting software businesses, Salesforce's implementation of AI has led to significant year-over-year growth in key areas.
• 🎯 The market's current apprehension towards some software companies regarding AI is seen as an overhang that may dissipate.

Top Stock Picks for the AI Trade

• 💡 Google is highlighted as a top pick due to its vertically integrated business model, Gemini product, TPU sales, growing cloud business, and thriving YouTube platform.
• 💰 Berkshire Hathaway's recent investment in Google underscores its strong fundamentals and potential.
• 🛒 Amazon is another favored pick, with expectations that its e-commerce and AWS businesses will drive significant growth, benefiting from the dissipation of tariff and AI overhangs.
• 📊 Amazon's ad business is also noted for its profitability and growth, contributing to its appeal.

Salesforce's AI Implementation and Market Perception

• 💬 Salesforce's agent force implementation has seen a 330% year-over-year increase, with their data cloud business up 114%.
• 📉 The market's underreaction to Salesforce's performance is attributed to concerns about AI's potential to disrupt software businesses.
• ✅ However, Salesforce's dominance in CRM and its use of AI to enhance its business are seen as strong indicators of continued success.

Market Dislocation and Opportunities

• 🔍 Opportunities are identified in companies where market dislocation has occurred, such as Amazon, which has lagged due to overhangs.
• 🚀 The expectation is that these overhangs will fall away, allowing investors to recognize the value in Amazon's core businesses.
• 📈 Expansion of margins in Amazon's e-commerce and AWS businesses, coupled with strong growth in its ad segment, positions it for future success.