AI Bubble Unlikely to Burst Soon

AI Bubble Unlikely To Wan Soon, Says BofA Analysts  

Bank of America Corp. strategists, led by Michael Hartnett, suggest that while the excitement surrounding stocks related to artificial intelligence has reached unprecedented levels, it is unlikely that they will drop in the immediate future.

AI sector’s promising prospects driving momentum for tech stocks 

Hartnett wrote in a note that AI’s promising prospects have sparked enthusiasm, resulting in significant market momentum for companies such as Nvidia and Microsoft, which has contributed to the S&P 500’s positive performance in the first half of the year. The strategist however warned that despite the AI “baby bubble” being resilient due to low real rates (nominal interest rates adjusted for inflation), there are concerns that tighter financial conditions in August could pose challenges for risk assets.

According to Hartnett, in the 2020s, international markets, spanning from Treasuries to oil, Bitcoin, and stocks, have evolved into a realm of “excessive movements,” with fluctuations in asset values now considered the standard pattern. He further pointed out that AI represents the latest manifestation of this overshooting trend.

Following the remarkable surge in AI stocks, the current emphasis lies in exploring the technology’s influence on businesses’ financial performance, as evidenced by the recent earnings reports from various companies. For instance analysts have noted that Microsoft’s financial results did not meet the overly optimistic expectations of an instant AI-driven boost. On the other hand, Meta Platforms Inc. experienced significant growth as AI substantially enhanced their advertising efficiency. As for Nvidia, the leading choice of Wall Street in the AI sector, their upcoming earnings will be out later in August.

Investors should focus downside opportunities in tech and credit

Hartnett gave a justified bearish stance in 2022 but his current pessimistic outlook on US stocks in 2023 is yet to materialize. In the Friday note, the strategists suggested directing attention towards emerging segments and commodities as favorable investment options for the remaining summer period. They also highlighted tech and credit as potential assets to consider for downside opportunities in the upcoming autumn.

The BofA analysts also brought attention to significant financial movements during the week ending on July 26, based on data from EPFR Global. According to the EPFR Global data equity inflows were $13.5 billion with inflows resurgence to the US of around $9.9 billion while Europe experienced its 20th consecutive week of redemptions, with outflows totaling $1.3 billion.

In terms of sectors, the data indicated that materials had the most significant inflows over the last 25 weeks and in the last two weeks it attracted $1.9 billion. This trend reflects investors’ positioning for an improved outlook in China.

Despite the market activity, Hartnett observed that there hasn’t been a mass movement away from cash. In fact, there have been inflows into the cash asset class over the last two weeks, with a total of $104.1 billion invested in cash so far this month. 

Finally the data shows that bonds had a net influx of $11 billion, with investment grade bonds resuming inflows while high-yield experienced outflows.

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