Buy AI Stocks on Pullbacks: Barclays Strategists
Artificial Intelligence-related stocks have been flying high, helping catapult US equity to new highs. With the S&P 500 up by more than 10% for the year and the Nasdaq index up by more than 30%, there have been concerns as to whether the market has run too hot. That appears not to be the case, with strategists at Barclays advising investors to buy any pullback.
AI Fueled Rally
According to the strategists, any pullback on AI-related stocks would present an ideal entry point as valuations are still reasonable and not overly stretched. Therefore, any pullback would offer an opportunity to buy at a discount as AI look set to be a catalyst for the foreseeable future. The Barclays team believes that the ever-growing AI economy will help strengthen valuations level over the long term.
The current rally in the market is already eliciting comparison to the dot com rally that was mostly driven by tech stocks in the early 2000s. However, Barclays strategists believe it is a different case, as the current rally is mostly supported by profitable businesses rather than speculative ones.
Widespread AI adoption is expected to occur in 10 years and result in GDP growth of 1.1% for ten years. On the other hand, earnings per share in the next ten years are expected to be 11% higher from current levels, with the S&P 500 value expected to be 9% higher.
Analysts at Capital Economics share similar sentiments, which have since increased the year-end forecast of the S&P 500 to 5,500 from an initial target of 4,500. According to analysts’ investors’ enthusiasm for AI will increase significantly, helping fuel further rallies in the equity markets.
Strategists at Bank of America and RBC have also increased their year-end price targets for the S&P 500, believing AI technology will grow further and act as a catalyst for equity indices. On the other hand, strategists at Goldman Sachs believe the S&P 500 remains undervalued at current levels as it is only up by about 12% compared to a 33% gain of the Nasdaq 100. According to the analysts, increased focus on AI could push the index higher.
AI Big Winners
The bullish bets on AI fueling further rallies in the equity markets come at the backdrop of a solid earnings season. Companies with exposure to revolutionary technology delivered solid earnings results. Nvidia posted stellar earnings results and guided revenues of $11 billion for the current quarter, beating consensus estimates of $7.2 billion.
Google and Microsoft are other companies poised to benefit from the AI revolution. The two have already integrated AI-powered tools into their search engine as they look to strengthen their competitive edge in the lucrative business.
Amid the increased focus on AI-related stocks, strategists are warning that the outperformance of the US stocks at the index level could stretch valuation levels. Therefore, investors would be better off diversifying their portfolios by targeting international equities.
However, with the Federal Reserve going slow further monetary policy could act as an important catalyst to sustain the current rally. With interest rates not expected to increase further, the prospects of rate cuts boards well with tech-related stocks that perform well in low-interest rate environments.