{"id":34724,"date":"2026-08-28T11:09:38","date_gmt":"2026-08-28T15:09:38","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/?p=34724"},"modified":"2026-08-28T11:09:39","modified_gmt":"2026-08-28T15:09:39","slug":"ai-valuation-signals","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/ai-valuation-signals","title":{"rendered":"AI: Valuation signals"},"content":{"rendered":"\n

By Joseph Wu, CFA<\/strong><\/p>\n\n\n\n\n

Valuation reset<\/h2>\n

\n The narratives around AI continue to oscillate between enthusiasm over its\n transformative potential to concerns about the scale of capital expenditures\n (capex), monetization and disruption risks.\n<\/p>\n

\n With capex by eight of the largest U.S. tech companies expected to exceed\n US$1 trillion in 2027<\/a>, according to Bloomberg, we view skepticism around the AI\n investment theme as healthy and warranted. But it is equally important to\n recognize that markets have not remained static. Valuations have already\n adjusted meaningfully to reflect various uncertainties and risks.\n<\/p>\n

\n A broad basket of tech and AI-related companies now trade at roughly 20x\n forward earnings, down almost 30 percent from 28.5x in Oct. 2025 and well\n below its 24.5x average since 2015. The relative valuation correction has been\n just as pronounced. From 2015 to 2025, this AI cohort commanded an average\n forward price-to-earnings premium of 30 percent to the S&P 500. That\n premium has fallen sharply, bringing the group close to parity with the\n broader market.\n<\/p>\n\n

Valuation premium has almost vanished<\/h3>\n

Broad AI basket versus S&P 500<\/h4>\n
\n
\n
\n \"Relative\n\n\n\n
    \n
  • \n
    <\/div>\n Relative forward P\/E\n <\/li>\n
  • \n
    <\/div>\n Average (2015\u20142022)\n <\/li>\n
  • \n
    <\/div>\n Average (since 2015)\n <\/li>\n
  • \n
    <\/div>\n Average (2023\u2014present)\n <\/li>\n <\/ul>\n

    \n Note: Broad AI basket includes the S&P 500 Info Tech sector (70\n percent) and equally weighted Amazon, Alphabet, and Meta Platforms\n (30 percent). The different averages in the chart contrast two distinct\n periods around the AI cycle. The 2015\u20132022 average premium (1.33x,\n 33 percent) captures the period before the start of the AI investment\n cycle. The 2023\u2013present average premium (1.25x, 25 percent) captures the\n period after the start of the AI investment cycle.\n <\/p>\n

    \n Source – RBC Wealth Management, Bloomberg; data through 8\/21\/26\n <\/p>\n

    \n This is a line chart showing the relative forward price-to-earnings\n (P\/E) ratio of a broadly defined AI basket of stocks comprised of 70%\n S&P 500 Info Tech sector and 30% equally weighted Amazon, Alphabet, and\n Meta Platforms vs. the S&P 500. From 2015 to 2025, this AI cohort\n commanded an average forward P\/E premium of 30% to the S&P 500. That\n premium has fallen sharply over the past 12 months, with the group now\n trading close to parity with the broader market on a forward P\/E basis.\n <\/p>\n <\/div>\n <\/div>\n<\/div>\n\n

    Trillion-dollar themes<\/h2>\n

    \n The potential drivers behind this valuation reset can be broadly distilled\n into several interconnected themes. The first concerns the capex cycle runway\n and financing. For much of the past three years, the largest tech companies\n were able to fund their investment programs from internally generated cash\n flow. That equation has changed as capex has grown much faster than cash\n flows. Major hyperscalers retain strong balance sheets and ample access to\n capital, but rising capital intensity means debt and other external financing\n are becoming more important to the AI buildout. This makes the investment\n cycle more sensitive to the cost of capital and the willingness of investors\n and lenders to provide funding. According to one of our third-party research\n providers, year-to-date AI capex debt issuance has already surpassed $250 billion, nearly doubling last year\u2019s pace.\n<\/p>\n

    \n Next is monetization. For the capex cycle to remain durable, several things\n have to happen. Hyperscalers need to generate faster revenue growth and\n attractive returns from data centres (cloud computing services) that exceed\n their cost of capital. Innovations in AI products and services need to\n continue apace in order to drive adoption and increase compute demand. And\n enterprises need to convert AI experimentation into measurable improvements in\n sales, costs or productivity. We think the Q2 2026 earnings season provided\n some encouraging signs that the demand side remains healthy. Microsoft,\n Amazon and Alphabet\u2014the three largest cloud infrastructure providers and the\n biggest AI spenders\u2014all reported accelerating revenue growth, strong margins\n and record backlogs.\n<\/p>\n

    \n We think sustained momentum in financial results will be crucial to bolster\n confidence that AI spending can generate adequate returns on invested capital.\n This has implications for the biggest initial beneficiaries of the AI boom,\n the infrastructure suppliers\u2014particularly semiconductor and memory chip\n makers, which have captured an outsized share of the economic benefits so far\n through extraordinarily high profitability. But because tech hardware\n industries have a long, cyclical history of steep corrections after periods of\n peak demand, the market is understandably assessing whether current\n profitability represents a durable increase in earnings base or a temporary\n windfall that could fade as supply constraints ease.\n<\/p>\n\n

    Can Tech companies keep their return on equity advantage?<\/h3>\n
    \n
    \n
    \n \"Calendar\n
      \n
    • \n
      <\/div>\n Broad AI basket\n <\/li>\n
    • \n
      <\/div>\n S&P 500\n <\/li>\n <\/ul>\n

      \n Note: Return on equity is a measure of how well a company uses equity\n capital, calculated by dividing net profits by average shareholder\n equity.\n <\/p>\n

      \n Source – RBC Wealth Management, Bloomberg consensus estimates; data\n through 8\/21\/26\n <\/p>\n

      \n This is a bar chart showing the calendar year return on equity (ROE) of\n a broadly defined AI basket of stocks comprised of 70% S&P 500 Info Tech\n sector and 30% equally weighted Amazon, Alphabet, and Meta Platforms vs.\n the S&P 500 since 2023. The broadly defined AI basket maintains a higher\n ROE vs. the S&P 500, but this gap is expected to narrow over the next\n two years, according to Bloomberg consensus figures. In 2023, the broad\n AI basket had a ROE of 29% vs. the S&P 500\u2019s 18%; 2024: 30% vs. 18%;\n 2025: 33% vs. 19%; 2026 estimate: 40% vs. 23%; 2027 estimate: 37% vs.\n 23%; and 2028 estimate: 32% vs. 22%.\n <\/p>\n <\/div>\n <\/div>\n<\/div>\n

      \n Finally, disruption risks will likely linger. Software has been at the\n epicentre of early concerns and valuation pressure recently, but AI could\n reshape business models across a much wider range of industries over time.\n Meanwhile, the unit economics of AI products and applications remain unproven,\n with lower-cost models from Chinese developers adding another layer of\n complexity for markets to digest.\n<\/p>\n\n

      Burden of proof<\/h2>\n

      \n We believe AI has the potential to become a foundational technology for the\n economy, with applications spanning consumers and businesses. But the optimism\n that has propelled AI stocks higher since 2023 has given way to a more\n discerning and disciplined environment.\n<\/p>\n

      \n Despite strong adoption and growth trends, valuations for the AI equity\n complex have compressed as market participants have become more conscious of\n the enormous capital requirements, uncertain monetization paths and wide\n dispersion of potential long-term outcomes associated with a rapidly improving\n technology still in its early stages. Markets tend to price such uncertainty\n by demanding a larger margin of safety, and we think that adjustment appears\n to have taken place to some extent. Whether today\u2019s valuations, which appear\n more reasonable to us, have adequately discounted those risks and the\n probability of less favourable outcomes will take time to determine.\n<\/p>\n

      \n As the AI investment theme enters the \u201cshow me\u201d phase, we believe each\n quarterly reporting season should help provide additional evidence on whether\n capital spending is producing commensurate revenue growth and cash flows. For\n valuations to stabilize or return to a premium, we think markets will need to\n see the companies most directly linked to AI continue to demonstrate durable\n demand momentum, improving monetization and an ability to sustain\n above-market profitability over the long term.\n<\/p>\n","protected":false},"excerpt":{"rendered":"

      The equity market segment more directly tied to AI has undergone a notable valuation adjustment amid sharper scrutiny of AI capex durability, monetization timelines and disruption risks. Can the companies deliver on profitability expectations?<\/p>\n","protected":false},"author":22,"featured_media":34725,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"rbcwm_post_date":"2026-08-27T09:05:06","editor_notices":[],"rbc_url_alias":"","rbcwm_featured_desktop_image_position":"","rbcwm_featured_mobile_image_position":"","_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[73],"tags":[238,1129,1130,1131,1132],"rbcwm_content_owner":[607],"rbcwm_need":[],"rbcwm_segment":[],"rbcwm_solution":[],"rbcwm_topic":[74],"rbcwm_channel":[],"rbcwm_format":[],"class_list":["post-34724","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-ai","tag-ai-investment-2","tag-ai-investment-cycle","tag-capex","tag-capital-expenditures","rbcwm_content_owner-pag","rbcwm_topic-global-insights"],"acf":{"rbcwm_subtitle":"The equity market segment more directly tied to AI has undergone a notable valuation adjustment amid sharper scrutiny of AI capex durability, monetization timelines and disruption risks. Can the companies deliver on profitability expectations?","rbcwm_post_author":"","rbcwm_custom_breadcrumb_text":"","rbcwm_custom_breadcrumb_link_url":"","rbcwm_disclaimers":{"add_disclosures":["Yes"],"perspective_disclaimer":"","expandable":"","omit_from_pages":"","disclaimer_footnote":""},"rbcwm_insight_cta_id":[11937],"rbcwm_pagination":{"next_link":"","next_link_text":"Next article","previous_link":"","previous_link_text":"Previous article"},"rbcwm_video_duration":"","article_time":"","rbcwm_enable_toc":false,"rbcwm_toc_selector":"h2","rbcwm_toc_sub_selector":false},"yoast_head":"\nAI: Valuation signals<\/title>\n<meta name=\"description\" content=\"The equity market segment more directly tied to AI has undergone a notable valuation adjustment amid sharper scrutiny of AI capex durability, monetization timelines and disruption risks. 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