How Should Investors Evaluate Innovation?
Sources: Visual Capitalist, Edison Institute, BofA Research.
Source: Morgan Stanley Research estimates.
Sources: Visual Capitalist, Edison Institute, BofA Research.
Source: Morgan Stanley Research estimates.
Every generation experiences a handful of watershed moments that quietly change the direction of the future. The shifts may not feel obvious at the time. They can be incremental, experimental, or even impractical. But in hindsight, the innovations that underlie such shifts can define entire eras of economic growth, wealth creation, and competitive advantage.
The most powerful innovations often begin as enabling tools rather than finished products, as infrastructure rather than applications. Their true impact is revealed over time, spreading quietly across industries and rewriting cost structures, productivity curves, and competitive moats. By the time their influence is widely recognized, much of the opportunity has already been captured.
For investors, this creates a persistent imbalance: the future tends to arrive faster than expectations adjust. And when innovation compounds – building on itself across successive waves – the gap between perception and reality can become extraordinarily large.
Understanding innovation, therefore, is not about predicting the next headline or betting on novelty. It is about recognizing the underlying forces that raise the economic baseline and accelerate the pace of change. Investors who develop a framework for identifying these forces as they take hold may find themselves positioned not just for the next cycle, but for the defining opportunities of a generation.
This cumulative process is not theoretical. It can be seen across the historical arc of the Industrial Revolution, for example. Each major wave of technological and industrial progress began at a higher baseline of productivity than the wave before it, accelerating both economic growth and societal transformation. Over time, innovation has not only lifted output but shortened the distance between waves, increasing the pace of change.
While many investors appreciate the idea of innovative growth, they often underestimate the magnitude and the breadth of its impact – and this is where the opportunity lies.
Innovation tends to follow recognizable patterns. What begins as a breakthrough in a specific technology domain eventually diffuses outward, becoming operational innovation across healthcare, industrials, financial services, energy, and consumer markets, for example. The most durable opportunities frequently emerge not at the point of invention, but at the point of adoption – when large, established industries integrate new tools to reduce costs, expand capabilities, and fundamentally reshape their economics.
In other words, technological innovation rarely stays confined to the technology sector. Its most powerful effects often appear when it transforms how the rest of the economy operates.
So how should investors think about innovation in a disciplined, repeatable way?
In our view, rather than focusing on novelty alone, investors can benefit from evaluating innovation through four core lenses:
This framework helps separate transformative innovation from incremental improvement – and investor excitement from investability.
Although it may seem like artificial intelligence (AI) popped up out of nowhere in 2022, the building blocks were growing for more than a decade as data was compiled and computing power grew exponentially. ChatGPT was the spark that lit the inferno. Today’s AI-related advancements, as with any innovation, should be analyzed through the framework laid out above.
Let’s consider AI through the four lenses to assess investment in innovation.
If there has ever been a time to focus on innovation – AI or otherwise – that time is now. Investors should continue to evaluate companies on the strength of their business models and to employ valuation discipline, but today, a company that isn’t innovating, in our view, is a company waiting to be disrupted.
Innovation is the foundational driver of economic progress. Each technological wave builds upon the last, raising the baseline of productivity and accelerating the pace of change. For investors, recognizing innovation as a structural multiplier – and understanding where it is diffusing across industries – can be essential to capturing long-term growth and avoiding the companies most vulnerable to disruption.
The opportunity is not simply to invest in what is new, but to identify where innovation is quietly reshaping the global economy.
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