Banking giants Morgan Stanley and Bank of America (BofA) are issuing a warning about the AI trade, noting that buying at current levels could have more risk than reward.
The News
Daniel Skelly, head of market research and strategy at Morgan Stanley Wealth Management, says the AI trade could start losing bullish momentum, similar to a pattern witnessed during the mid-1990s tech cycle, reports The Street.
According to Skelly, positions are extremely concentrated in semiconductors, IT hardware and power, or areas that are seen as beneficiaries of the massive AI buildout. Skelly recommends that investors pivot from “buy” to “hold,” believing that AI models will require less compute and less power next year based on historical tech patterns. According to the Morgan Stanley executive, the decline in demand could negatively impact the revenue of some high-flying AI names over the long term.
Meanwhile, BofA strategists say investors should start taking a defensive stance amid weakening technical signals. According to the analysts, the stock market continues to climb to all-time high levels, but fewer stocks are driving the advance. The strategists also see diverging momentum, meaning prices may be rising as the rate of acceleration declines.
The BofA analysts believe investors should continue holding strong stocks while preparing for an elevated risk of a market pullback through September.
What It Means for Investors
The case for a meaningful market pullback is becoming stronger by the day as more institutions see cracks in the foundation of the rally that has carried equities to record highs. On top of rising bond yields, investor exuberance, higher inflation, and liquidity drain from blockbuster IPOs, BofA is sounding the alarm about weakening market breadth and momentum, while Morgan Stanley is pointing to historical patterns.
The stock market can still go higher, but prudent investors should start taking notice. If the banks are correct, the window to reposition is becoming narrower with each trading session.
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