Investors may want to exercise some caution with this year’s leading artificial intelligence stocks, according to Bank of America. “History shows the winners from new tech booms are often the broad economy, not early investor benefactors,” wrote Jared Woodard. “Credit spreads say the stock rally is unstable, flashing the biggest warning since the dotcom bubble.” The investing and ETF strategist anticipates some profit-taking in megacap technology stocks during the second half as investors become “impatient for an AI killer app” or more revenues. He notes that just four stocks account for 50% of returns in global equities since 2021. Stocks have rallied this year as investors mount bets on popular AI names such as Nvidia and megacap technology. The ongoing surge from late 2022 has lifted major averages to new highs, while also fanning some fears of an impending bubble. NVDA YTD mountain NVDA year to date “The narrow U.S. market rally, premised as it is on extended capex cycles and quiescent capital, looks shaky,” Woodard said, noting that profit growth expectations for stocks within AI ETFs have dropped 16 points from a peak in February. “Investors are getting restless.” For Nvidia in particular, he noted that each new chip reduces the value of some of its older investments. Shares of the leading chipmaker have rallied more than 140% this year. “No one denies the computing power,” Woodard wrote. “But after one last frenzied rally around the latest chips, investors may come to doubt the near-term economics.” Woodard views AI as the latest example of new technologies over the years that have boosted productivity but struggled to swiftly recover their investment. Referring to railroad growth in the 1800s and the internet craze in the 1990s, he notes that the reward didn’t come until after the bubble burst. Given this backdrop, Woodard expects long-term investors to potentially fare better in “reliably underpriced” areas relative to the S & P 500. This includes small cap value stocks, utilities, energy and banks. He also favors regional investing in areas such as India and Latin America.
