Is the AI Stock Bubble About to Burst?

BOfA Strategist Warn of Tech Stock Bubble Amid AI Focus

Technology stocks have been on an impressive run, posting significant gains on the back of solid earnings reports. Likewise, increased focus and interest in plays with exposure to artificial intelligence have also helped fuel the impressive run. Tech-heavy NASDAQ index is already up by more than 25% for the year signaling investors’ confidence in tech plays. Amid the impressive gains of Bank of America, Strategist Michael Hartnett believes a bubble is slowly brewing in the tech sector.

FED Monetary Policy Uncertainty

Hartnett, who is accredited to predict a U.S. recession, recommends that investors sell the S&P 500 as stocks are poised for a major pullback from current highs. In his research note to investors, the strategist maintains the U.S. Federal Reserve is far from completing its monetary policy tightening and could hike interest rates.

The sentiments come as a surprise given that the market has already priced in the FED, reaching its peak on interest rate hikes. However, with inflation levels pulling back from four-decade highs of 9.1% to about 4.8%, many analysts believe the FED will not hike further but instead focus on rate cuts at year-end.

However, Hartnett maintains a different view insisting that if the FED is indeed pausing rate hikes and potentially moving to rate cuts, then bond yields should be rising above the 4% threshold. That has not been the case, with the 10-year yield struggling to rise above the 3.7% level. The yield has only surged in recent days amid the ongoing debt ceiling debacle in the U.S.

Tech Stocks Bubble

Confident that the FED has not yet reached the end of its monetary policy tightening, Hartnett believes tech stocks face an uncertain future. The stocks are the most susceptible to interest rate hikes as such actions trigger significant increases in borrowing costs, making it hard for the companies to access cheap capital needed to support and fuel research and development activities.

Additionally, Hartnett maintains that the recent explosive run among tech plays fueled by the A.I. race has only led to a “baby bubble”. According to the analyst, bubbles always start with easy money, eventually ending with interest rate hikes as the FED swings into action. At the height of the internet stocks rally in 1999, complimented by solid economic data, the FED resorted to monetary policy tightening, a move that only led to the bursting of the tech table nine months later.

The FED hiking the funds rate to 6% in the race to try and bring the inflation level to 2% could be catastrophic. In recent weeks the markets have been pricing a potential interest cut before the end of the year as one of the ways of averting the U.S. economy plunging into recession. The markets expect interest rates to drop to 3% to cushion the fragile economy.

Amid the concerns raised by the BOfA strategist and uncertainties about interest rate hikes, stocks continue to edge higher. The recent rally has been fueled by growing optimism that lawmakers are closer to a deal that will result in the raising of the debt ceiling.

Tech heavy index Nasdaq has already surged to its highest level in over a year, signaling growing bullishness on tech play. In contrast, financials remain under pressure; sentiments weighed heavily by the banking crisis. As a result, the sector has registered a third week of outflows.

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