The frenzy over artificial intelligence-linked stocks has gone too far but won’t die down just yet, according to Bank of America Corp. strategists led by Michael Hartnett.
The excitement around the technology’s potential has ignited a rally in the likes of Nvidia Corp. and Microsoft Corp., driving first-half gains in the S&P 500. While real rates — nominal interest rates minus the rate of inflation — are too low to pop what Hartnett called the AI “baby bubble,” tighter financial conditions will be a challenge for risk assets in August, he wrote in a note.
Global markets from Treasuries to oil, Bitcoin and stocks have turned into a “world of overshoots” in the 2020s, according to Hartnett, describing these swings in asset prices as “the new normal.” AI is “simply the new overshoot,” he said.
After the blistering gains in AI stocks, the focus, for now, is on the technology’s impact on corporate bottom lines, with the earnings season painting a mixed picture. Analysts said Microsoft’s results failed to live up to lofty hopes about an immediate boost from AI. Meta Platforms Inc., on the other hand, soared after AI helped it improve the efficiency of advertising. Nvidia, Wall Street’s top pick for the AI trade, reports later in August.
Hartnett was rightfully bearish in 2022, but his pessimistic view on US stocks in 2023 hasn’t yet played out. In Friday’s note, his team tipped emerging markets and commodities as assets to bet over the rest of this summer. They identified technology and credit as “autumn downside plays.”
The BofA strategists also highlighted key flows in the week through July 26, citing data from EPFR Global. Here are the takeaways:
- There were $13.8 billion of inflows to equities, with inflows resuming into the US at $9.9 billion and Europe seeing a 20th week of redemptions at $1.3 billion.
- By sector, materials had the largest inflow over the past 25 weeks, attracting $1.9 billion in the past two weeks, as investors position for an improvement in China’s outlook.
- Hartnett sees “no exodus from cash,” with the asset class seeing inflows over the past two weeks with investors pouring $104.1 billion to cash this month to date.
- Investors poured $11 billion into bonds, with inflows resuming for investment grades and high-yield seeing outflows.
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