Tech investors tend to focus on the largest and most well-known companies, the so-called Magnificent 7.¹ However, beneath the surface, a more nuanced story is playing out. Small and mid-sized growth companies have been generating impressive earnings growth and are often trading at more reasonable valuations than their larger peers.² But why have these companies lagged behind their larger counterparts, and where are the next major growth opportunities?

To explore these questions, Pathstone’s Michael McGowan, Head of Investment Strategy, recently sat down with Jim Robillard, Founder and Chief Investment Officer of Spyglass Capital Management, to discuss the future of artificial intelligence (AI) and humanoid robotics.

The case for small and mid-caps

The conversation delved into the often-overlooked potential of small and mid-cap growth companies, which have been generating strong earnings growth and are frequently trading at more reasonable valuations compared to their larger counterparts. Michael suggested that the concentration of capital in the largest technology companies, known as the Magnificent 7, has created a mispricing opportunity in the small and mid-cap space. “The market’s focus on the Magnificent 7 has left a lot of smaller, innovative companies undervalued,” he noted.

Bloomberg, UBS AI Indexes. Please see end notes for index descriptions.

A new industrial revolution

The discussion then shifted to the transformative impact of artificial intelligence (AI) and robotics, which are seen as driving a new industrial revolution. AI has already begun to reshape various sectors, including manufacturing and healthcare, and is expected to continue doing so in the coming years.³ One of the most significant effects of this trend highlighted in the conversation is the potential for AI to create deflationary pressures by reducing costs and increasing productivity, leading to lower prices and higher profit margins.

The discussion also touched on the legitimate concerns about job displacement and income inequality that arise from such technological advancements. It was noted that, historically, industrial revolutions have also generated new jobs and industries that did not previously exist. “While AI and robotics will displace some jobs, they will also create new opportunities and industries we can’t even imagine yet,” Michael suggested.

The rise of humanoid robotics

Another key area of focus was the rise of humanoid robotics, which are believed to have the potential to revolutionize industries like manufacturing and healthcare. The cost of developing and deploying these robots has decreased significantly, making them more accessible to a broader range of companies.⁴ The development of advanced AI and machine learning algorithms is seen as crucial for enabling robots to learn and adapt in real-time, allowing them to perform complex tasks that were once the exclusive domain of humans.

Conclusion

Looking beyond the Magnificent 7 reveals a universe of small and mid-cap companies that are driving growth and innovation in the AI and robotics space. The companies best positioned for sustained success are those that can adapt and evolve in response to changing technological and economic trends. “Investing in AI and robotics requires patience and a long-term perspective. The winners will be those who can stay ahead of the curve,” Michael concluded.