Jefferies warns AI earnings growth to slow sharply in next 2 years, urges investors to diversify

The slowdown comes after a strong run in AI-linked stocks, raising questions about whether their earnings growth can continue to justify elevated valuations. “It has become time to diversify beyond AI,” said Jefferies’ Global Head of Quantitative Strategy Desh Peramunetilleke in the report, making the case for investors to broaden their exposure beyond the technology theme. Non-AI stocks trade at nearly half AI valuations

Valuations are another reason investors could consider diversifying beyond AI, the Jefferies report said. Global AI stocks trade at 23 times forward price-to-earnings (PE) on an equal-weighted basis, compared with 13 times for stocks outside AI, according to the report. This means investors are paying a significantly higher multiple for AI-linked companies, even as their earnings growth is expected to cool over the next two years.

The shift is also visible in emerging markets, where investment leadership is broadening beyond AI-linked stocks. According to Peramunetilleke, AI stocks in emerging markets have seen a significant slowdown in returns in the second half of 2026, following an exceptional rally. The group gained 81 percent in the one year through June, while several sectors outside AI have delivered strong returns in the second half of the year.

Semiconductor stocks face a tougher test Despite the call to diversify, Jefferies’ GREED & fear portfolio continues to hold companies that supply the infrastructure behind AI, even as it avoids companies directly spending money in the ongoing AI capital expenditure race. The portfolio holds positions in Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics and SK Hynix, but has lower exposure to these stocks than their weight in regional benchmarks would suggest.

As of Wednesday, TSMC, Samsung Electronics and SK Hynix together accounted for 32.1 percent of the MSCI AC Asia ex-Japan Index. Their combined weight in the GREED & fear Asia ex-Japan long-only equity portfolio was 16 percent. The portfolio also had a lower allocation to South Korea and Taiwan, which together represented 48.5 percent of the MSCI AC Asia Pacific ex-Japan Index, compared with 44 percent in its Asia Pacific ex-Japan relative-return portfolio.

The report added that its underweight position in South Korea had recently been moved to neutral following the market’s underperformance. Jefferies’ base case remains that Samsung Electronics and SK Hynix could retest their June highs if the AI capital expenditure cycle continues. Easy gains in semiconductor stocks may be behind While Jefferies continues to see scope for further gains if AI-related spending remains strong, the report cautioned that much of the easy money in semiconductor stocks has already been made.

The concentration of these companies in emerging market benchmarks also makes it difficult for fund managers to avoid them entirely. TSMC, Samsung Electronics and SK Hynix together accounted for 28.5 percent of the MSCI Emerging Markets benchmark, according to the report. That leaves investors facing a difficult balance: semiconductor stocks remain important to benchmark performance, but their high valuations and the prospect of slower earnings growth make diversification increasingly relevant.