Beware overhype about AI and make these 7 smart investments instead, according to a tech portfolio manager at a $120 billion firm

• Lower inflation and a resilient labor market have many market pundits excited about the economy.
• Technology investor Jonathan Curtis is bullish, though he’s worried about AI stocks in late 2023.
• Below are seven parts of the market that Curtis is comfortable investing in now.

Even after the recent market pullback, there’s plenty for investors to be happy about right now.

So far in 2023, stocks have outperformed strategists’ predictions, and the Federal Reserve’s top economists now believe a recession is increasingly unlikely. Inflation is returning to normal levels, and the labor market is still strong, owing to lower layoff rates and an abundance of available jobs.

For these reasons, Jonathan Curtis, director of portfolio management at the $120 billion Franklin Equity Group, is one of many money managers who is bullish.

“We feel pretty good about the prospects for a more soft landing,” Curtis told Insider recently. “The Fed is probably nearing, if not completely finished, with rate hikes, and they’re able to thread the needle on the other part of their mandate, which is the labor market.”

AI stocks may become a victim of their own success

Despite several well-founded reasons for optimism, there is always the risk that positive sentiment will overpower the market and cause it to crash.

Curtis’ only concern right now is that stocks linked to artificial intelligence, which have driven the S&P 500 higher this year, may fail to deliver on massive hype in the near term. Some optimism about AI is warranted, according to Curtis, but its true impact may take years.

“We’ve had all this excitement around AI — stock prices have gone up, and we are very bullish on the long-term prospects for AI,” Curtis, who leads his firm’s technology research team, said. “But we’re still in the experimentation phase of AI, not the revenue phase.”

“Investors will have to digest in the second half of the year that stock prices have done very, very well, but revenue from AI isn’t there yet,” Curtis continued. It’s coming, and we’re confident it will, but the fact that it isn’t yet creates some risk in the market. And we’re seeing some of that in the volatility of some of these names in the tech sector.”

Although revenue and earnings for many AI-related companies aren’t significant, the demand for workers with AI expertise is, according to Curtis. Nonetheless, while he remains focused on the long term, he acknowledges that AI stock valuations are ambitious, if not a little crazy.

“That revenue opportunity I described will really start showing up in 2024 and 2025,” Curtis said. “Will investors be patient enough to wait for that, or will we see volatility — and will that be beneficial to investors like us?” I believe it will, but that remains to be seen.”

7 places to invest for the rest of 2023

This year’s market gains have been largely driven by a handful of outstanding technology companies, according to Curtis, though he expects the strength to spread further.

Investors should look for companies in seven different sectors, industries, and styles, according to Curtis.

Regardless of market or economic conditions, Curtis believes it is prudent to prioritize quality businesses that are well-run, have a competitive advantage due to economic moats, have plenty of cash on their balance sheets, and have strong or improving financial metrics.

Curtis gravitates toward growth-oriented companies, particularly those in the technology sector, given his position. Early-stage companies are frequently undervalued by the market because it’s unclear whether they’ll succeed, according to Curtis, so finding them can pay huge dividends.

While the portfolio management director believes investors should be wary of the volatility of AI stocks in the short term, he believes AI is well worth investing in over the long term.

“We believe we are at the start of a major new growth cycle,” Curtis said, referring to artificial intelligence. “Everyone can effectively have the most well-read agents sitting on their shoulder, helping them be better at nearly everything they do, at least in the knowledge worker space,” he added. As a result, we believe that generative AI will have a significant impact on productivity.”

Curtis also highlighted the industrials and energy sectors, including those in the often-overlooked energy transformation industry, outside of technology. The market veteran is a rare investor who invests in both traditional and renewable energy companies, claiming that peak oil demand is still a long way off and that electric vehicle companies will continue to gain traction.

“We also like energy transformation — the need for industry, for the planet, to transition to not only more sustainable but ultimately less impacting on the planet,” Curtis added.

Finally, Curtis stated that small- and mid-cap stocks offer some of the best opportunities in the market. Large-cap companies have had an impressive run, but he believes they will struggle in the near term.