Wall Street's AI Boom Just Reached a Dangerous Milestone. History Says the Winners Could Change.

Wall Street has spent the past few years rewarding companies that have had almost anything to do with the artificial intelligence (AI) trade: hyperscalers, semiconductor chip makers, memory providers, cloud companies, and equipment manufacturers. All of these areas have had their moment as market leaders.

A Columbia University estimate puts cumulative AI infrastructure investment and spending at around $9 trillion from 2025 to 2032. It also projects that this will need to generate more than $3.5 trillion in annual revenue by 2032 in order to just break even. Those are extraordinary numbers and show how high the bar will be for these companies to generate a proper return on investment (ROI).

But there's a question that investors might be missing. What if the biggest beneficiaries of the AI boom actually aren't the ones spending all of that money? What if the winners are somewhere else?

Image source: Getty Images.

Taking a lesson from the internet boom

In the late 1990s as the internet was in its infancy, telecom companies started spending huge amounts to build out new fiber optic networks. Investors assumed that internet traffic would grow so quickly that the infrastructure would have a huge ROI. Internet usage did explode, but the market was wrong about who would be the big winners.

In the end, the telecom companies built too much infrastructure, new investment collapsed, and its value dropped significantly. Telecom stock prices took a big hit, and for a while, they were a pretty poor investment.

But that build-out did produce winners. The quality of the equipment and infrastructure improved dramatically, and costs came way down. That helped a lot of the burgeoning internet-based businesses become financially feasible much more quickly.

In the end, the tech succeeded, but the companies that built it out weren't the ultimate winners. The businesses that used the finished product did better.

1800s railroad construction tells a surprisingly similar story

The economy looked far different back then, but 19th century railroad expansion had a similar outcome. Companies invested heavily in new materials and building out new routes. That came at a considerable cost at first. Then competition came in, there was a period of over-construction, and mixed economic conditions all ended up hurting the ROI on a lot of that infrastructure spend.

But the broader economy benefited enormously. Rail became the cheapest and fastest way to transport goods. Shipping rates dropped significantly, which directly benefited the factories and manufacturers looking to get their products out to farmers and other customers in different markets.

Again, it was the businesses that ended up heavily using the new infrastructure that benefited the most, not the ones that were deeply involved and invested in its development.

How to invest for the next phase of the AI trade

If competition and technological improvements make AI substantially cheaper and more accessible, end users who implement this into their businesses could become more attractive.

I like the State Street Industrials Select Sector SPDR ETF (NYSEMKT: XLI) as a real opportunity. Manufacturers should be able to reduce production costs. Transportation companies could improve their logistics. Other industrial companies could use AI for everyday things like predictive equipment maintenance to reduce downtimes and increase efficiency.

The tech sector via funds like the Vanguard Technology ETF (NYSEMKT: VGT) or the Fidelity MSCI Information Technology Index ETF (NYSEMKT: FTEC) could still prove to be good investments. But there's a lot of good news already priced in, and these booms tend to reverse at some point in time.

As is usually the case, I'd maintain investments like the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the Vanguard Morningstar Total Stock Market ETF (NYSEMKT: VTI) for the core positions in your portfolio. I'd consider the State Street Industrials Select Sector SPDR ETF as a complementary position with a small allocation, especially for those whose portfolios are heavily invested in tech already.

I think we're at the stage now where those involved in the AI build-out are still benefiting. In time, however, the companies that best take advantage of what's already been built could be the biggest winners.

David Dierking has positions in Vanguard Information Technology ETF and Vanguard Morningstar Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.