AI Prompts in Equity Research: Spotting Stocks that could Outperform

Researching Stocks in 2025 & our Youtube channel

January 04, 2025

Artificial Intelligence (AI) is revolutionizing investing, but its true potential lies in asking the right questions. With nine out of ten managers already incorporating AI into their strategies, the real challenge isn’t adoption—it’s precision. Poorly crafted queries can easily lead to incomplete insights, while well-structured prompts could reveal actionable opportunities. In this edition, we’ll discuss how to potentially identify stocks that could do well in 2025 as well as those that could underperform. As in previous editions of our newsletter, we will give examples of inefficient vs. effective prompts to enhance your decision-making.

A great way to craft effective prompts is by explicitly defining what you want to achieve—whether it’s identifying top-performing stocks, spotting potential underperformers, or analyzing resilience under specific scenarios. Here are three examples that demonstrate this principle in action:

1. Researching Stocks that may Outperform in 2025

Inefficient Prompt:
"Which stocks will perform well in 2025?"

  • Why it’s Inefficient:
    Broad and vague, lacking a clear definition of "perform well" or any metrics for evaluation.

Effective Prompt:
"Identify three stocks from different sectors that analysts forecast to outperform the S&P 500 index in 2025. For each stock, provide key metrics such as the Price-to-Earnings (P/E) ratio, recent revenue growth rates, and notable earnings surprises. Additionally, include a brief explanation of the industry trends or company-specific factors driving the expected performance. Please provide references."

  • Why it’s Effective:
    Includes measurable criteria, a clear time frame, and diversification across sectors, leading to more targeted results.

 

2. Spotting Stocks that may Underperform in 2025

Inefficient Prompt:
"Tell me which stocks will lose money in 2025."

  • Why it’s Inefficient:
    Too simplistic, with no specific definition of "lose money" or inclusion of critical financial data.

Effective Prompt:

"Identify three stocks within the Nasdaq 100 index that are likely to underperform in 2025 based on the following criteria: declining profitability, high debt-to-equity ratios, and operation in industries facing significant macroeconomic headwinds. Provide specific examples, an explanation for why each stock is likely to underperform, and reliable references to support your analysis."

  • Why it’s Effective:
    Focuses on concrete factors such as profitability and debt, while also tying performance to broader economic trends.

  

3. Scenario-Based Stock Analysis

Inefficient Prompt:
"Which stocks might fail if the economy goes bad?"

  • Why it’s Inefficient:
    Unclear and subjective, with no structure or defined risk factors.

Effective Prompt:
"Given a potential global economic slowdown in 2025, identify three S&P 500 companies at increased risk due to high leverage, heavy reliance on discretionary spending, and low cash reserves. Contrast these with three resilient S&P 500 companies likely to perform well under such conditions due to low debt, stable cash flow, and non-discretionary product offerings. Please provide reliable references."

  • Why it’s Effective:
    Defines a scenario, includes precise risk factors, and balances the analysis by highlighting resilient stocks.

 

Key Takeaway

Clarity and structure are key. By incorporating measurable metrics, time frames, and context, effective prompts turn AI into a powerful tool for investment research. Try testing these prompts and notice the difference they make!

What’s your favourite prompt or strategy? Share your thoughts—your feedback helps us stay focused and improve. In the next edition, we’ll dive into how adaptability in AI prompting can spark creativity and deliver deeper insights. Stay tuned!

(Please add our email address to your contact list so that the next newsletter goes into your Inbox folder: [email protected])

Several upcoming events to watch in the markets:

January 11, 2025 – U.S. Consumer Price Index (December)(https://www.bls.gov/cpi/)

The Bureau of Labor Statistics will release the December CPI data, offering insights into inflation trends across consumer goods and services. This report is crucial for understanding price stability and potential Federal Reserve actions.

 January 13, 2025 – U.S. Retail Sales (December)(https://www.census.gov/retail/marts/historic_releases.html)

December retail sales data will shed light on consumer spending during the holiday season, reflecting confidence levels and economic momentum heading into 2025.

 January 14, 2025 – Big Bank Earnings Begin (Q4 2024)

Major banks, including JPMorgan Chase and Citigroup, are expected to release their fourth-quarter earnings. Key focus areas include loan growth, net interest margins, and provisions for credit losses.

This Week in History:

January 10, 2000: America Online (AOL) announced an agreement to purchase Time Warner for $162 billion, marking the largest-ever corporate merger at that time.

January 12, 1999: The euro was officially launched as a currency on January 1, 1999, but it began its first full week of trading across global markets, including Wall Street, during this period.