The AI story is moving from excitement about spending to hard questions about returns. With the S&P 500 (^GSPC) near record highs and the Russell 2000 (^RUT) at a record, investors who feel they missed the run have not. The market stays constructive on stocks, and it rewards selectivity now. The right move is to look at your portfolio, find the holes, cover the gaps, and rebalance.
Inflation and the Fed
July CPI came in line with expectations, a calm reading the market treated as Goldilocks. Paired with last week's soft July jobs report, this takes a lot of pressure off the Fed. Markets rose because they priced in the Fed not hiking in September, and treasury yields fell. PPI is the next data point to watch. For now it is safe to stay invested.
The AI trade has changed
Early on, the AI story was all about the spend, and that momentum was clear. Now earnings reports have shifted the mood to "show me the money" and "show me the timeline" - how long until this spending gets monetized. The key question for any AI holding: what is the company actually delivering versus promising?
I favor the picks and shovels approach - owning the infrastructure that every AI buildout needs rather than betting on a single application. Think of it as an AI portfolio built on a core and satellite model, not a single AI trade.
Microsoft (MSFT)
Microsoft is a strong example of AI monetization becoming visible. It gives investors exposure to AI without forcing a bet on one application model. This past quarter, Azure growth was exceptionally strong, which answers whether AI spending is actually producing results. Microsoft has staged a sharp recovery over the past month, back above its year-to-date level, though it still needs improvement on a year-over-year basis. Opportunity remains here.
Caterpillar (CAT)
Caterpillar was once a pure industrial story - big diggers and construction. It is now an AI story. AI needs an enormous amount of physical infrastructure and electricity, which drives demand for the generators, turbines, and equipment that support data centers. That makes Caterpillar a core picks and shovels holding.
Schneider Electric
Schneider Electric (SBGSY) has outperformed the S&P 500 year-to-date. It is a global leader in energy management and electrification, and it supplies the data centers directly. That makes it a clean industrials play on AI.
Rounding out the list
Alongside Microsoft (MSFT), Caterpillar (CAT), and Schneider Electric, financials belong on the list too, with Goldman Sachs (GS) named as a pick.
