Jefferies’ Chris Wood says it’s time to diversify beyond AI as earnings growth for global AI stocks is expected to slow. He noted, “it has become time to diversify beyond AI.” Investors should look at India and China, as high valuations and rising borrowing costs make the sector risky now.
Synopsis
Jefferies’ Chris Wood is urging investors to diversify beyond AI as earnings growth for global AI stocks is expected to slow sharply and valuations remain elevated. His Asia portfolio retains exposure to semiconductor companies while avoiding heavy AI capex spenders, with India, China and other Asian markets featuring prominently in the allocation.
As global AI stocks are expected to see earnings growth slow from nearly 100% in 2026 to 30% in 2027 and 22% in 2028, while their valuations remain almost twice as high as those of non-AI stocks, Jefferies’ Global Head of Equity Strategy Chris Wood has urged investors to diversify beyond AI. He argues that rising borrowing costs for companies are at the centre of the spending boom and raise questions about how long the market will continue funding the trade.
In his latest GREED & fear note, he highlights a warning from Jefferies’ global quantitative strategy team: “it has become time to diversify beyond AI.”
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The case for diversification rests on both earnings and valuations. Global AI stocks are expected to see earnings growth slow from around 100% in 2026 to 30% in 2027 and 22% in 2028, according to the report.
The slowdown outside AI is expected to be less severe. Earnings growth for the global ex-AI basket is projected to decline from 16% this year to 9% in both 2027 and 2028.
That divergence is becoming more important because AI stocks are already trading at a substantial premium. Global AI stocks trade at about 23 times forward earnings on an equal-weighted basis, compared with 13 times for the ex-AI basket, the report said.
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For investors, the implication is not necessarily that the AI theme is over. Rather, the market may be moving into a phase where earnings delivery, credit conditions and valuation discipline matter more than the sheer scale of AI-related spending.
The first warning signal is emerging in credit markets. Jefferies said investors should remain focused on credit spreads for evidence that markets may no longer be willing to fund the ongoing AI capital expenditure boom or, as the report puts it, that “the credit card will be taken away.”
Five-year credit default swap spreads for Oracle and CoreWeave have risen sharply. Oracle’s spread climbed from 186 basis points on September 11 to 288 basis points, while CoreWeave’s jumped from 749 basis points to 1,118 basis points. Both were the highest levels recorded since the AI capital expenditure cycle began in early 2023.
The yield on CoreWeave’s bond maturing in 2032 has risen to 14.8%, underscoring the increasing cost of financing the infrastructure being built around the AI boom.
The report also points to a broadening of market leadership. AI returns in emerging markets rose 81% over the year to June, but momentum slowed significantly in the second half of 2026. Several sectors outside AI, meanwhile, have delivered stronger returns during the period.
That shift could create opportunities in companies and industries that benefit from the broader technology investment cycle without carrying the same valuation premium as the leading AI stocks.
Wood’s Asia allocation offers another indication of where investors could look. The portfolio remains exposed to the “picks and shovels” of the Asian AI ecosystem, including semiconductor companies, but does not own companies spending heavily in the ongoing AI capital expenditure race.
TSMC, Samsung Electronics and SK Hynix together account for 32.1% of the MSCI AC Asia ex-Japan Index. Their combined weight in Wood’s Asia ex-Japan long-only portfolio is 16%.
That positioning reflects both the importance of semiconductors and the risks of excessive concentration. The report notes that the easy money has already been made in semiconductor stocks. It also points out that shares have sold off even when companies have reported results broadly in line with expectations.
Micron shares, for example, have fallen 14% since reporting results on September 30. Samsung Electronics and SK Hynix are scheduled to report their earnings later in October, making the upcoming results an important test for the AI trade.
Despite the caution, Wood’s portfolio is not abandoning Asia. It is overweight China, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam relative to the regional benchmark.
India accounts for 12% of the recommended Asia-Pacific ex-Japan allocation, compared with a 10.5% weighting in the benchmark. China is assigned a 22% allocation against 19.5% in the index, while Hong Kong has a 6% allocation against 3.1%.
Vietnam, which has no current benchmark weighting, carries a 2% recommended allocation.
The portfolio is underweight Taiwan, with a 25% allocation compared with 28.6% in the benchmark. Korea is also underweight at 19% against 21.1%, although the report said its earlier underweight position in Korea had been moved to neutral after the market’s recent underperformance.
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