Morgan Stanley: The application rate of AI is increasing

Morgan Stanley's report released on November 6, 2025, pointed out that the adoption of artificial intelligence (AI) by enterprises is moving from the "storytelling" phase to the "seeing results" phase, with more and more companies achieving quantifiable financial and operational benefits. This trend not only validates the long-term value of AI but also reveals new market dynamics for investors.

According to the Wind Trading Desk, the report indicates that the "quantifiable" benefits derived from AI are steadily increasing. The core impact on investors is:

First, the efficiency gains brought by AI will support corporate profit expansion, with net profit margins for the S&P 500 expected to increase by 30 basis points by 2026.

Second, market leadership will spread from a few tech giants to a broader range of "AI adopters," providing investors with opportunities to capture growth outside the tech sector.

Finally, although the market is concerned about valuation bubbles, the report compares current conditions with the differences during the 1999 tech bubble using detailed data, arguing that the solid fundamentals justifying current high valuations provide confidence for investors' long-term holdings.

The Quantifiable Benefits of AI Are Becoming More Prominent, with Increasing Momentum in Applications

The "quantifiable" benefits that enterprises derive from AI are steadily increasing. Through systematic analysis of approximately 7,400 earnings call transcripts and 6,100 industry conference minutes, Morgan Stanley found:

• Among companies identified by analysts as "AI adopters," 24% mentioned the quantifiable impact of AI in the third quarter of 2025, up from 21% in the second quarter and 15% in the same period last year.
• In the broader S&P 500 constituents, 15% of companies reported measurable AI benefits in the third quarter of 2025, also higher than 14% in the second quarter and 11% in the same period last year.

These benefits are primarily reflected in six major areas, with "productivity improvements" (such as operational efficiency) and "financial impacts" (such as cost savings and revenue growth) being the most frequently mentioned. Notably, companies currently mentioning AI benefits are more focused on cost reduction, with the frequency being nearly twice that of revenue growth. This indicates that in the early stages of current AI integration, companies are primarily focused on improving internal efficiency and streamlining operations through technology, rather than immediately achieving top-line growth.

Technology and Communication Industries Lead, with Industry-Wide Penetration Underway

The report clearly states that the application of AI is not limited to the technology sector. Although tech companies are far ahead in demonstrating quantifiable AI benefits, the momentum in other industries is also significant

Industry Leaders: In the third quarter of 2025, 39% of companies in the technology sector mentioned the quantitative benefits of AI, ranking first. This was followed by the communication services sector (26%) and the financial sector (16%).

Fastest Growing Followers: In terms of year-on-year trends, the progress in the energy sector is the most remarkable, with the proportion of companies mentioning AI quantitative benefits rising from 0% in the same period last year to 10%. The penetration rate in the technology sector also increased from 26% to 39%, showing a trend of continuous deepening.

Industry Segment Breakdown: Within the technology sector, the "Software and Services" sub-industry has the most outstanding AI application results, with as high as 59% of companies reporting quantitative benefits, far exceeding other sub-industries.

This cross-industry diffusion trend validates Morgan Stanley's view that in the next 6-12 months, market leadership will spread from a few giants to a broader range of industries, and the sources of profit growth will become more diversified.

This is not 1999: Why the current market is fundamentally different from the tech bubble

In the face of the capital expenditure boom brought about by AI, concerns about a repeat of the 1999-2000 tech bubble have been rampant. Morgan Stanley's report conducted an in-depth analysis and reached a clear conclusion: the present is different from the past. The fundamentals of the current market are much healthier than in 2000.

1. Higher index quality and more abundant cash flow: The median free cash flow yield of large-cap stocks is currently about 3.5%, nearly three times that of 2000 (1.2%). Additionally, after adjusting for profit margins, the forward P/E ratio of the S&P 500 is about 35% lower than at the peak of the tech bubble. This indicates that today's market is dominated by companies with stronger profitability and cash flow.

2. More reasonable valuations for leaders and stronger profitability: The median forward P/E ratio of the top ten weighted stocks in the S&P 500 is currently 31 times, which is not only far lower than the peak of 44 times in 1999 but also below the 35 times level in 1998, representing a 13 times valuation discount compared to 1999. More importantly, these companies also have stronger profitability, with a median operating profit margin over 20% higher than in 1999.

3. A completely different macro environment: The years 1999-2000 were typical of the end of an economic cycle, with the Federal Reserve continuously raising interest rates to curb overheating. In contrast, the market is currently emerging from a "rolling recession" into the early stages of a "rolling recovery," with the Federal Reserve in a rate-cutting phase. Loose monetary policy provides strong support for high valuations.

4. A healthier credit market: The telecom construction boom at the end of the 1990s was primarily driven by corporate debt, with participants mostly being companies rated BBB/BB, leading to a sharp increase in leverage. In contrast, the current round of AI capital expenditure is led by extremely strong "hyperscale computing companies" such as Microsoft (AAA rated), Google, and Meta (AA rated) They have ample cash reserves and low reliance on the debt market. At the same time, today's credit market's depth and breadth are far from comparable to the past, and risk diversification is healthier.

In summary, Morgan Stanley's report paints a positive picture for investors, depicting an accelerated implementation of AI applications, continuously improving profit prospects, and an expected expansion of market breadth. Additionally, through rigorous data comparisons, the report strongly refutes the "bubble theory," asserting that the current market valuation level is sustainable, supported by strong fundamentals and a favorable macro environment.

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk