The growth rate of AI infrastructure is likely to slow due to increased competition, says the head of T. Rowe Price Investment Management.

US equity returns were dominated by three themes in 2024: one, the rise of artificial intelligence (AI) and its derivatives; two, the strong performance of rate‑sensitive cyclical stocks in anticipation of US Federal Reserve rate cuts; and three, soaring valuations of perceived “safe bets” despite unchanged earnings growth.

In 2025, all three of these themes could unwind, says Stephon Jackson, head of T. Rowe Price Investment Management.

The growth rate of AI infrastructure is likely to slow due to increased competition, says Jackson in a Nov 28 note. “Cyclical stocks’ valuations are currently high after strong performance this year, although their risk/reward profile is more mixed for 2025.”

Many of the stocks are now at or near all‑time high valuations, he adds, with low expected growth rates.   Looking ahead, Jackson anticipates a “continued expansion” of investible opportunities. These are characterised by “historically attractive valuations” in certain sectors, the normalisation of fundamental trends post‑Covid-19 and improvement in growth, thanks to lower interest rates and fiscal support.   Jackson sees a “broadening opportunity” set in US equity markets that spans several sectors. “Small‑caps, which are trading at a historic discount to large‑caps, should benefit from further rate cuts and any signs of an improving economy. In addition, we could be in for a multi-year regime change of capex and investment spend in energy, which would also benefit small‑cap stocks.”

Across sectors, US financial names look “interesting”, adds the 17-year T. Rowe Price veteran. “After Fed rate increases led to such poor performance for banks and real estate investment trusts in 2024, the market is anticipating better performance for this rate‑sensitive group should rate cuts continue into 2025.”

Energy, which underperformed “significantly” over this year, could see “reasonable upside potential” in several subsectors, adds Jackson.  

“We see company‑specific opportunities in industrials given the normalisation of markets following the post‑Covid-19 volatility,” says Jackson. “Most of these are in aerospace, electrical contractors, agriculture, municipal spending and consumer‑related building products.”

Within healthcare, the life sciences sector “appears likely to benefit” from a reacceleration of growth in biopharmaceuticals production and as early‑stage research picks back up after some major patent expirations among large pharmaceutical firms, according to Jackson. 

Elsewhere, Jackson says there are “plenty” of software firms that were not immediate beneficiaries of AI that have strong earnings growth prospects and are attractively valued. 

Finally, although utilities have traded higher recently, the sector should benefit from rising demand due to AI, and is therefore likely to deliver faster earnings growth, he adds.