MW Investors continue to underestimate AI. These are the next hot plays, says five-star manager

By Barbara Kollmeyer

Alger's Patrick Kelly says AI advances are only speeding up

Investors continue to underestimate where AI is headed, says fund manager Patrick Kelly.

Even top-performing funds have been unable to escape the pressure from the Middle East conflict.

The five-star Morningstar-rated Alger Focus Equity Fund ALAFX, which has been a top performer over three, five and ten years, dropped over 9% this year.

Patrick Kelly, who co-manages the fund with Ankur Crawford, said "the bigger picture of secular trends that are going on within the market and the economy" remain the same even with new geopolitical and inflationary pressures.

The fund's biggest weighting is information technology. A year ago, Kelly spoke about how AI usage was reaching an inflection point, with more daily usage and demand.

"We've only seen that continue where the technology behind AI continues to rapidly improve," he told MarketWatch in a Tuesday interview.

He noted that last year saw a major inflection in genetic AI coding, with many developers now managing a team of agents to write code.

"We think this is a significant development because we've been saying for years that when AI begins to write the majority of software code or close to all of software code, the innovation can really accelerate and go exponential," he said.

That long-term view is one reason he wasn't that surprised to see the selloff in software stocks this year.

"We obviously want to be positioned in companies that are innovating and benefiting from this change and trying to avoid many of the traditional business models that are being disrupted," he said. "And we acknowledge that there may be more losers and winners."

He points to one big theme they like - infrastructure names that provide hardware to help AI models function - citing Western Digital $(WDC)$, which makes hard disk drives that store data.

"From a high level, data is exploding and AI makes the data more valuable, so more and more data is now being stored as a result, and that's leading to a significant increase in demand for Western Digital and hard disk drives," he said.

Kelly noted that Western Digital now derives nearly 90% of its revenue from cloud customers, thanks to AI demand. That has led to more stable product pricing, and the company has been able to meet strong demand without significantly raising cash, he said.

Kelly believes a recent pullback for the stock linked to a Google AI tool to cut memory usage was likely overdone.

But there is a lesson within these fast-moving developments. "Things are changing at such a rapid clip, you can't get locked in or married to any one position. You have to constantly evaluation your positions and the competitive risks and the opportunities," he said.

Kelly also flags another stock, AI cloud company Nebius (NBIS) for its strong engineering culture and "tremendous demand" for its services.

"We think they can emerge as a leading AI hyperscaler," he said. Nebius also has a number of interesting private investments, such as data analytics firm ClickHouse, which could be worth a significant portion of the company in future. he said.

Kelly said they have reduced exposure to independent power players that he was keen on a year ago, given political challenges around building new data centers.

As for investors, Kelly cautions that they "continue to underestimate the impact of technology and innovation across the entire economic and investment landscape.

"I think people tend to look where AI is today and not where it's going."

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are rising as oil prices (CL.1) (BRN00) drop. Gold (GC00) is up.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              6438.46    -1.80%  -5.55%  -5.95%  14.30% 
   Nasdaq Composite                                                     21,191.83  -2.62%  -5.88%  -8.82%  21.44% 
   10-year Treasury                                                     4.323      -4.60   25.10   15.10   14.60 
   Gold                                                                 4652.6     3.96%   -8.76%  7.40%   47.77% 
   Oil                                                                  102.75     16.25%  37.35%  78.98%  44.43% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

President Donald Trump said the U.S. will leave Iran in two to three weeks, and will address the nation at 9 p.m. Eastern. The U.A.E., meanwhile, wants the U.S. and other nations to help forcefully open the Strait of Hormuz, according to reports.

Private-sector payrolls for March are due at 8:15 a.m., with retail sales for February at 8:30 a.m., followed by the Institute for Supply Management's manufacturing survey at 10 a.m.

Nike shares $(NKE)$ are sinking after forecasting weak sales and saying turnaround efforts were lagging.

RH stock $(RH)$ is tumbling as tariffs and bad weather hit results for the luxury home-goods retailer.

Beyond Meat shares (BYND) are down as sales dropped and it said its annual report won't be filed on time.

Microsoft $(MSFT)$, Chevron $(CVX)$ and investment fund Engine No. 1 are reportedly in talks over a $7.1 billion power deal.

St. Louis Fed President Alberto Musalem will speak at 9:05 a.m., and later Fed Gov. Michael Barr will deliver comments.

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The chart

U.S. gasoline prices recently topped $4 a barrel, but other countries have it much harder, this Goldman Sachs chart shows. "While policy has kept retail fuel prices stable in India, diesel prices have risen nearly 150% in South Africa and around 115% in the Philippines since February," said a team of commodity analysts led by Daan Struyven.

Top tickers

These were the top-searched tickers on Marketwatch as of 6 a.m.:

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   TSM     Taiwan Semiconductor Manufacturing 
   GME     GameStop 
   MU      Micron 
   AMZN    Amazon 
   NIO     NIO 
   AMD     Advanced Micro Devices 
   CJMB    Callan JMB 
   MSFT    Microsoft 

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BEYOND THE NEWS

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-Barbara Kollmeyer

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April 01, 2026 06:43 ET (10:43 GMT)

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