Volatility and the rise of artificial intelligence (AI) are key factors currently driving market returns and growth. Danielle Menichella (Sands Capital), Tom King (Nanuk), and Joel Connell (Bell Asset Management) discuss global equities, including the rise of AI and investment opportunities outside of the mega-caps.
Since the market shock of the COVID pandemic back in 2020-2023, global equity markets have experienced sharp, episodic spikes in volatility. While a broader primary uptrend (a sustained, long-term upward movement in the overall market) remains intact, the speed and size of pullbacks (a brief decline or pause in the generally upward price trend of a stock or other asset) — as well as style and sector rotations — have been severe.
For Danielle Menichella, CFA — Co-Portfolio Manager at Sands Capital — this is the result of a structural rewiring of how markets process risk, information, and capital flows.
To illustrate the severity of these swings, Danielle points to the events of April 2, 2025 (‘Liberation Day’), when an unexpected U.S. tariff announcement triggered a massive 10.5 per cent plunge in the S&P 500 over two days — erasing almost US$7 trillion in market value. However, the market quickly rebounded, surging about 10 per cent one week later, when a pause on the tariffs was announced.
By Jayson Forrest
Danielle Menichella, CFA
Co-Portfolio Manager
Sands Capital
Joel Connell
Portfolio Manager
Bell Asset Management
Tom King
Chief Investment Officer
Nanuk
Continued.....
Addressing the topic ‘Beyond the hype: What’s really driving growth’ at the 2026 IMAP Portfolio Management Conference in Sydney, Danielle attributes the relative aggression felt in markets to a couple of key factors.
“Today, the S&P 500 forward price earnings are over 20x, which is a 13 per cent premium to its 10-year average. And even excluding the U.S., the MSCI EAFE Index (Europe, Australasia, and the Far East) is trading at close to 20x, which is about a 30 per cent premium to its history.
“Also, we’ve had significant macro and geopolitical uncertainty around interest rates, inflation, trade, conflicts, and even war, which has kept discount rates unstable. Importantly, we are starting to see AI-driven trading and analytics, which helps explain why sentiment gets repriced so quickly.”
Add to this the hyper-concentration of stocks, with the top seven stocks in the S&P 500 comprising about 40 per cent of its market cap this year. Danielle says this concentration is at an unprecedented level, far surpassing the 18 per cent peak of the top five stocks during the dot-com era (roughly 1995–2000), and the 37 per cent peaks seen in 1932.
“This creates index fragility, where idiosyncratic moves in mega-caps dictate the entire market direction, especially with the rise in the number of passive funds following suite,” she says.
We’ve had significant macro and geopolitical uncertainty around interest rates, inflation, trade, conflicts, and even war, which has kept discount rates unstable. Importantly, we are starting to see AI-driven trading and analytics, which helps explain why sentiment gets repriced so quickly
The new norm
When asked about market volatility, Danielle doesn’t believe volatility will come under control anytime soon, instead, saying: “This may be the new norm.” However, there is some good news. Despite stocks experiencing short-term volatility, over the long-term, Sands Capital points to three key fundamentals as part of longer term investment performance:
1. Earnings growth is the dominant driver of stock returns. If a company consistently grows its earnings above average rates, and in-line or better than market expectations, investors will eventually take notice and the stock will appreciate.
2. Concentration. A small number of businesses have created a disproportionate amount of market wealth. For example, from 2016-2019, just five companies accounted for almost one-quarter of net-wealth creation. Therefore, stock selection is critical.
3. Valuations. Valuation shifts create volatility in the near-term, but over time, they have limited impact on long-term returns — with valuation re-ratings and de-ratings cancelling each other out.
“We believe markets will remain volatile, but doing good bottom-up research, and focusing on growth potential, sustainability of competitive advantage, market leadership, and attractive business fundamentals, this should yield a small number of businesses that can be owned in a concentrated way over long time horizons,” says Danielle. “And the value from that earnings growth should be realised over time, despite the volatility.”
We think the AI phenomenon is absolutely an economic event and not a bubble. And the data centre capex cycle we’re in at the moment is extremely likely to continue over the medium-term
AI as a growth opportunity
When identifying stock opportunities in a volatile market environment, Sands Capital looks for growth businesses exposed to different earnings drivers and secular trends. One such thematic is artificial intelligence (AI).
Danielle doesn’t believe AI is a ‘bubble’, instead, saying the market is still in the early days of AI value creation — both for companies selling AI and customers using it. And while some stocks are significantly trading up, like Nvidia (up 1,200 per cent over the past five years), other stocks, like ASML and TSMC, are only trading at slightly double their price.
“We know there is a lot of demand for AI. You only need to look at the annual capex of hyperscalers (like Google, META, and Microsoft). There was a doubling in demand between 2024 and 2025 — from about US$240 billion to US$412 billion — which represents the time from the launch of ChatGPT to the release of DeepSeek, Gemini, Claude, and agentic AI,” says Danielle.
This year, capex spending on AI by hyperscalers is conservatively forecasted to grow by about 60 per cent to US$650 billion. Danielle has even recently heard some forecasts predicting US$850 billion, and over US$1.2 trillion by 2028.
To illustrate the growth and adoption of AI by major businesses, Danielle quotes Amazon CEO, Andy Jassy, who recently said: “The barrier to entry for building a complex software product has effectively dropped to $0. We saw a team within our logistics division rebuild a global routing engine in 14 days — a project we originally budgeted for 18 months and US$10 million.”
It’s a view supported by Joel Connell — Portfolio Manager at Bell Asset Management — who agrees the top five hyperscalers are predicted to spend well over US$600 billion this year on capex. However, he says while everybody is aware of the obvious beneficiaries of AI in the large cap space — like Nvidia and TSMC — there are also many great opportunities for investors in the small and mid caps (SMID) part of the AI supply chain sector. These include:
- Hoya — involved in developing semiconductor components for AI data centres.
- DISCO Corporation — a leading manufacturer of precision processing equipment used to cut, grind, and polish semiconductor wafers.
- Keysight — provides electronic design, emulation, and test solutions to accelerate innovation in industries like semiconductors.
- Fujikura — manufactures specialised, high-density optical fibre cabling and interconnection systems designed specifically for AI data centres.
- Emcor — provides critical physical infrastructure for AI, specialising in the planning, design, installation, and maintenance of data centre, electrical, and mechanical systems.
- Modine — a critical provider of thermal management infrastructure for AI-driven data centres.
“AI capex flows across multiple infrastructure layers, like connectivity and physical infrastructure, with many critical suppliers sitting in the global SMID universe,” says Joel. “These SMID companies are really benefitting from AI capex spend. And the interesting thing about all these companies (listed above) is they outperformed Nvidia in terms of their share price performance over the last 12 months. So, there are some great opportunities in SMID caps to leverage the AI thematic, which are well off the radar for many investors.”
When identifying opportunities, Bell Asset Management looks for companies with durable and sustainable competitive advantages, strong market positions, and long-term pricing power, while also being mindful of not overpaying for these companies.
“Valuations are important,” says Joel. “As an investor, in order to get paid, you just don’t want to buy good companies, you want to be buying companies trading at attractive prices. You have to be very diligent about what you’re buying for the longer term, and also the valuations you are paying. That’s because there are pockets of valuations that are getting quite excessive, which is something you need to be aware of.”
Valuations are important. As an investor, in order to get paid, you just don’t want to buy good companies, you want to be buying companies trading at attractive prices. You have to be very diligent about what you’re buying for the longer term, and also the valuations you are paying. That’s because there are pockets of valuations that are getting quite excessive, which is something you need to be aware of
Global supply chain diversification
According to Malcolm, India is poised to benefit from nearshoring trends, as the world looks to decouple from China and companies move to diversify their supply chain to reduce political risks. He also adds the Indian Government has put in place an investor-friendly Foreign Direct Investment (FDI) policy, under which most sectors are open for 100 per cent FDI through the ‘automatic route’ (no prior Government approval). As a result, FDI inflows have seen a steady rise — from US$36.05 billion (FY 2013-14) to US$80.61 billion (FY 2024-25).
“India has also been discussing trade deals with several countries and recently signed Free Trade Agreements with the U.K., New Zealand, Oman and the European Union,” says Malcolm. “After nearly 20 years of discussions with the European Union, India will see a cut in tariffs on about 99.5 per cent of Indian exports. Furthermore, we are optimistic on the recent trade deal with the United States.”
In our view, agentic AI makes a compelling case for more investment in this technology. AI is likely to be the biggest change we see in our lifetime. It will change our world in ways we have only imagined and in ways we cannot even imagine yet
A digital revolution
The digital story in India is also impressive. India launched its ‘Digital India Program’ in 2015, which has driven ‘new economy’ sectors from about 5 per cent to 15 per cent of GDP.
“There are genuine investment opportunities in India around technology. India accounts for 49 per cent of the real-time transactions market, and it has the third largest startup ecosystem in the world, with more than 123,000 startups and a record 127 ‘unicorns’ (startups with a value of over US$1 billion) worth more than a combined US$390 billion,” says Malcolm.
“Furthermore, with over 500 million consumers, India is expected to have the second largest cohort of online shoppers by 2030. We expect more companies to continue coming to market across various industries — from fast-moving consumer goods to rural micro-finance.”
We think the AI phenomenon is absolutely an economic event and not a bubble. And the data centre capex cycle we’re in at the moment is extremely likely to continue over the medium-term
Agentic AI: The new ChatGPT moment
And what about agentic AI? Danielle believes agentic AI is the new ‘ChatGPT moment’, but even more impactful. Agentic AI is the next evolutionary step in AI, where the technology is able to reason, self-learn, think about and check answers, execute workflows, make decisions, and report back to the user. Essentially, agentic AI is a digital worker.
“In our view, agentic AI makes a compelling case for more investment in this technology,” she says. “AI is likely to be the biggest change we see in our lifetime. It will change our world in ways we have only imagined and in ways we cannot even imagine yet.”
Sands Capital buckets companies likely to benefit from AI into three categories:
1. Enablers — those companies that provide critical infrastructure required to use AI, like semi-conductor providers, cloud providers, energy providers, and data centres.
2. Builders — those companies that create novel products and services, like data infrastructure, robotics, and autonomous systems.
3. Users — those companies that use AI to enhance existing businesses, like e-commerce, social media, personalised medicine, and cybersecurity.
In addition, Danielle says memory will be a major beneficiary of agentic AI. She expects the likes of Samsung Electronics, Seagate Technology, and SK Hynix to benefit from the increase in demand for memory, as AI agents (a software system that uses AI — typically large language models — to autonomously perceive, reason, plan, and take actions to achieve specific goals, rather than just generating text) increasingly supplement or replace workplace employees (knowledge workers).
However, she adds that the current undersupply of memory in the market is likely to be prolonged and exacerbated, as a result of the growth in agentic AI.
“AI agents live in memory. However, memory is at a choke point, because each AI agent needs more and more memory. At the same time, the number of AI agents is likely to explode,” says Danielle. “Today, we estimate there are less than 10 million agents, but if each knowledge worker got its own AI agent, that number would explode to 1 billion agents, which would expand total industry demand for memory by 20x.”
AI winners and losers
Danielle says part of the volatility seen in markets in relation to AI has come from what the market has deemed to be ‘AI winners’ and ‘AI losers’. She says perhaps the greatest group hit by the loser perception has been the indiscriminate bias against software businesses, especially ones reliant on recurring revenue.
However, she believes there are a number of “truly special” businesses that have been erroneously tagged as being ‘software’ that will actually benefit greatly from AI. She says these businesses are fully integrated, with proprietary hardware connected to their proprietary software.
Two examples of these businesses are:
- Samsara — a SaaS leader that helps reduce costs, improve safety, and increase the efficiency of industrial businesses through applying AI-enabled insights to the data gathered from its cameras and sensors; and
- Axon — a global leader in public safety technology, providing law enforcement with body-worn cameras, evidence management software, and conducted energy devices (commonly know as Tasers).
While agreeing there are significant expectations around agentic AI, with talk about jobs being replaced by AI agents, Tom King — Chief Investment Officer at Nanuk — cautions there is still a high risk of agentic AI failing to meet expectations over the short-term.
He explains: “Whilst we are moving in the direction where labour will increasingly be replaced by agentic AI solutions, we’re already seeing the use of agentic AI in an enterprise-scale (the ability of systems, software, and/or processes to handle the massive data volume, high user concurrency, and complex operational requirements of large organisations), in a secure and controlled way, is actually extremely difficult to do.
“This means the rollout of agentic AI will take longer than first expected, which means there are still significant roles for software and consulting businesses in making this happen.”
The point of no return
Although we’re still in the early days of AI, Danielle believes we have past the point of no return. She says too many companies have already seen what AI can do for them in terms of efficiencies and improvements, which the wider population is also beginning to recognise.
“And while there still will be plenty of regulatory decisions to consider relating to AI, I am confident that no government wants to be disadvantaged in this race,” she says. “AI is real and it’s happening. With the stakes as high as they are currently in military and defence, anti-fraud and financial crime, and cyber threats, we believe governments are very interested in promoting AI technologies,” she says.
“AI will also be instrumental in advancements in medicine and disease, robotics, and an autonomous digital workforce. We can well be on the cusp of some very big improvements in our world as a result of AI. Naturally, we feel very confident about the growth trajectory of this space.”
Tom agrees: “We think the AI phenomenon is absolutely an economic event and not a bubble. And the data centre capex cycle we’re in at the moment is extremely likely to continue over the medium-term.”
However, he also believes there are still many pieces of the jigsaw that need to come together in how AI plays out, including from a geopolitical perspective. He also agrees there is the issue of regulation, and the extent to which governments will begin controlling the way in which AI is used in consumer applications, which needs to be considered.
“We’re also bullish on AI and believe this trend will continue,” says Tom. “However, we believe the companies that are likely to benefit from AI in the medium-term will become the secondary and tertiary beneficiaries of this trend as AI continues to improve. This will affect a wide range of businesses and solutions — from energy infrastructure to optical data networks, through to businesses implementing and controlling the governance around these types of systems — which investors need to be aware of.”
About
Danielle Menichella, CFA is Co-Portfolio Manager at Sands Capital;
Tom King is Chief Investment Officer at Nanuk; and
Joel Connell is Portfolio Manager at Bell Asset Management.
They spoke on the topics ‘Beyond the hype: What’s really driving growth’ (moderated by Mike Gibb — Managing Director at Sands Capital) and
‘Global growth opportunities’ (moderated by Paul Saliba — Sector Head Equities and Fixed Income Fund Research at SQM Research)