I’m focusing on the big AI infrastructure players

As AI continues to attract capital and investor attention, Fidelity Portfolio Manager Matt Fruhan is favoring big companies that he believes are well-positioned to navigate the supply-constrained and increasingly expensive landscape for the fast-growing technology.

“In the recent narrow market environment, my strategy has been to overweight infrastructure-related companies and others developing data centers and the broader AI ‘backbone,’” says Fruhan, who manages Fidelity^® Large Cap Stock Fund (FLCSX). “These businesses have benefited from strong demand, which has contributed to supply bottlenecks and pricing power that has supported earnings growth.”

In leading the diversified domestic equity strategy, Fruhan focuses on large-cap stocks that he considers mispriced due to investors’ overreaction to changes in short-term earnings estimates. He believes that combining thorough research with patience and discipline can help investors capitalize on these pricing inefficiencies.

Fruhan’s approach to choosing stocks is largely based on his estimate of a company’s earnings potential over the next three to five years, though he acknowledges that forecasting can be more challenging with an emerging technology such as AI.

With this in mind, he is looking across sectors and emphasizing large companies with leading market positions and scale. He views these firms as better positioned to invest in increasingly costly AI tools, helping to lower costs while leveraging their extensive proprietary data to gain market share or develop value-creating products.

“I believe large companies adopting AI may have a competitive advantage, and I have positioned the fund accordingly, with select mega-cap holdings in financials, aerospace, energy and health care,” he says.

Within AI infrastructure, he cites AI-focused chipmaker Nvidia (NVDA) and Google parent Alphabet (GOOG/GOOGL), two of the fund’s top holdings as of August 31. Nvidia has benefited from soaring demand for AI chips, he notes, while Alphabet has gained as investors have become increasingly optimistic about its competitive position in AI, both through its chip business and its development of large language models.

Looking ahead, Fruhan believes the AI landscape will remain highly dynamic, with companies viewed as “winners” and “losers” potentially changing multiple times in the years ahead as technologies evolve.

Many questions about AI remain, according to Fruhan, as investors continue to debate the direction and sustainability of the technology. “Are we already at a cyclical peak in earnings? Or are we in the middle of a long-term growth cycle?” Fruhan asks, noting that investors with high conviction about where the market is headed may be fooling themselves.

“I plan to continue monitoring the market environment and gradually adjusting my AI investment strategy as conditions warrant,” Fruhan concludes. “Fundamental research is the bedrock of my approach, and I seek to capitalize on shifts in sentiment, particularly when investors grow anxious about AI or the duration of the capital investment cycle, as well as when enthusiasm leads to indiscriminate buying of AI-related stocks.”

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