Investors may need to exercise some caution with leading artificial intelligence stocks this year, according to Bank of America. “History shows that the winners of new tech booms are often the entire economy, not the early investors,” Jared Woodard wrote. “Credit spreads are signaling that stock rallies are shaky, raising the biggest warning since the dot-com bubble.” The investment and ETF strategist expects profit-taking in large tech stocks in the second half of the year as investors eagerly wait for an “AI killer app” or more revenue. He notes that just four stocks have accounted for 50% of global stock returns since 2021. Stocks have been rising this year as investors bet on popular AI stocks like Nvidia and large tech. A continued surge since the second half of 2022 has lifted major stock averages to new highs, but it’s also raising concerns that a bubble is looming. NVDA YTD Mountain NVDA YTD “The narrow rally in the U.S. market, premised on a long-term capital spending cycle and stagnant capital, looks shaky,” Woodard said, noting that earnings growth expectations for stocks in the AI ETF have fallen 16 percentage points from their February peak. “Investors are getting restless.” For Nvidia in particular, he noted that each new chip reduces the value of some of their older investments. The chip giant’s shares have risen more than 140% this year. “No one denies computing power,” Woodard wrote. “But after the last frenzy around the latest chips, investors may be beginning to question the short-term economics.” Woodard sees AI as the latest example of a long line of new technologies that boosted productivity but struggled to quickly recoup investments. He points to the growth of railroads in the 1800s and the internet craze in the 1990s, whose gains weren’t realized until the bubbles burst. Against this backdrop, Woodard believes long-term investors could do better in areas that are “solidly cheaper” than the S&P 500. That includes small-cap value stocks, utilities, energy and banks. He also favors investing in regions like India and Latin America.
According to Bank of America, retail investors in AI stocks could suffer losses similar to those of past bubbles.
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