AI powers on despite global uncertainty
THE artificial intelligence (AI) machine maintains its upward momentum with growing adoption across multiple sectors, despite tariff uncertainty and geopolitical tensions taking centre stage.
A Bain & Company survey found that 95 per cent of US companies are using generative AI, with production use cases doubling in just one year. In addition, more than 80 per cent of the use cases met or exceeded expectations.
Momentum in not just the private sector
In a historic first, the US Food and Drug Administration (FDA) announced that it would scale up the use of AI internally across all its centres by end-June, following the completion of a pilot for scientific reviewers.
Dr Martin A Makary, FDA commissioner, said that he was 'blown away' by the success of its first AI-assisted scientific review pilot, and that the agency-wide deployment of these capabilities 'holds tremendous promise in accelerating the review time for new therapies'.
We believe that AI could have a more significant impact on the economy and finance than was seen in the era of the Internet.
Driving earnings growth
This accelerating adoption of AI-enabled software and services has a real impact on company earnings and profit. In the first quarter of this year, 87 per cent of S&P 500 companies in the information technology (IT) and communication services sectors reported better-than-expected earnings, the highest percentage among various sectors.
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Specifically, earnings in the communication services and IT sectors grew 29.2 per cent and 17.5 per cent, respectively, ranking second and third among all sectors. Citi noted that analysts had forecast that the majority (64 per cent) of the S&P 500 earnings per share growth in 2025 would come from these sectors.
It also noted that 'AI-related growth may once again prove more durable than trade and consumer-sensitive segments', continuing the trend from the last two years.
AI-enabled software and services shine
Within the IT sector, the software industry has been gaining investor attention due to the productivity gains from generative AI technologies. The digital and scalable nature of software is also attractive as it is less affected by the ongoing tariff discussions and supply-chain shifts.
When a software tool enables a marketing team to produce five times the content, or a legal department to review contracts in half the time, it doesn't just reduce costs, it can also grow margins and improve speed to market.
Al-enabled software can deliver just that, and this is powerful across all industries, particularly in those with high labour intensity or process complexity such as healthcare, finance, logistics, and professional services. As a result, demand for such software is growing, with companies willing to invest more in developing such software capabilities.
Cybersecurity is another strong area for AI adoption. AI is used not only to detect and defend against attacks, but also to predict, adapt, and respond in real time to emerging threats.
The surge in remote work, cloud migration, and geopolitical cyber warfare has accelerated the demand for AI software in this domain, which is now a strategic necessity for enterprises, governments, and critical-infrastructure providers. These are typically sold through long-term contracts and priced at a premium, making it one of the most durable segments of AI-driven software.
In the communication services sector, major digital platforms have successfully used AI to increase digital advertising revenue by improving ad performance, hence improving click-through and conversion rates.
In addition, user engagement is enhanced with AI-curated content, which increases the time that users spend on the digital platforms, leading to more ad views and higher revenue for the platforms. The improved return on investment for advertisers is promoting higher ad spend on the digital platforms.
The increasing adoption of AI services is driving a surge in demand for AI cloud infrastructure and solutions. In the first quarter of 2025, total cloud revenue grew around 24 per cent year on year, reinforcing the role of 'cloud + AI' as one of the most powerful investment trends. Major software and communication services companies, which are also some of the largest cloud providers, will benefit from recurring, high-margin cloud revenue.
Beyond generative AI, a new category of tools called agentic AI is also emerging. Functions that can act autonomously with minimal human intervention are now being integrated into business software as sold as high-value automation layers.
Risks to watch
While AI technology is transformative, it is not without challenges. As AI use proliferates, so do concerns over privacy, misinformation, and ethical misuse.
Regulators are beginning to draft frameworks for responsible AI use – rules that will require more transparency, accountability, and oversight from software providers, particularly those handling sensitive security data. In addition, macroeconomic uncertainties remain elevated.
While equities have surged and volatility has plummeted in recent weeks on trade optimism, forward fundamentals remain deeply uncertain. So, even though software and services are not directly affected by tariffs, such uncertainties can have an impact on AI adoption if companies turn cautious and cut back in software spend and investment.
The aggressive capital-expenditure investment made by technology companies to build out AI capabilities could also hurt longer-term earning trajectories if AI adoption slows down.
In terms of asset allocation, we maintain a neutral positioning in equities. We see fundamental catalysts – such as confidence in US corporations' abilities to maintain and grow earnings above current estimates, or additional fiscal stimulus strengthening consumer sentiment – as necessary for additional substantial upside from here.
Relentless growth
The application of AI in business processes is delivering productivity gains and stronger business outcomes that have an impact on the bottom and top lines, providing companies with clear monetisation opportunities that will drive durable earnings growth.
In addition, software companies that can effectively integrate AI to improve outcomes for their customers are poised to outperform. Strong first-quarter earnings from large technology companies with dominant AI-enabled solutions have supported this.
Subscription-based AI services generate recurring and predictable revenue streams, driven by long-term enterprise contracts, which increase revenue stability.
As AI technology improves, there is also the opportunity to upsell additional AI features seamlessly which adds immense scalability.
AI-enabled software and services are also delivered digitally and will not be directly affected by physical supply-chain disruptions, which may be an additional consideration for investors today.
The next version of AI isn't just smarter, but it also has the potential to generate sustainable earnings in a volatile market, taking AI a step closer towards being the next big thing.
The writer is head of investment advisory for Asia South Wealth at Citi
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