Morgan Stanley warns that US stocks may be facing an uncomfortable setup even as fundamentals tied to artificial intelligence remain intact.
In a new Fox Business interview, the bank’s senior portfolio management director, Jim LaCamp, says his concern centers on where markets are most vulnerable, rather than where optimism is already priced in.
“It’s a double-edged sword, but it does concern me a lot because you also look at where is the pain trade? Where’s the trade nobody’s looking for? The pain trade is that the market would sell off.”
LaCamp points to historical patterns that suggest investors may be underestimating downside risk.
“Historically, it does do that in the second year of a presidential cycle. Now, you might be asking why, because there’s a lot of positives going on for this market.”
He says the risk is not necessarily obvious catalysts, but rather unexpected disruptions that hit when valuations are already stretched.
“Two concerns would be maybe valuations or something that we’re not thinking about yet. Maybe another government shutdown. Who knows? There are a number of places where a market speed bump, or road hazard or even volcano can happen. You just don’t know where these things come from a lot of times.”
According to LaCamp, markets trading at extended valuations tend to amplify the impact of those surprises.
“When the market’s very, very richly valued, we’re more sensitive to those kinds of disruptions.”
Despite those concerns, he emphasizes that artificial intelligence spending and corporate capital expenditure plans remain solid.
“The spend for AI and the CapEx plans for businesses in this area is still very solid. Yes, there are concerns, and there’s a lot of interdependency between these companies and there’s a lot of debt involved, but lower rates will help that from the debt side.”
LaCamp also draws a clear distinction between today’s AI-driven companies and the excesses of the dot-com era.
“These are real businesses. In the dot-com era, a lot of those were not real businesses at all. I think you can still be in these names as long as you diversify that portfolio a little bit and have some of these other areas. Space is an adjacent area. Robotics is an adjacent area to AI. These companies are all doing very, very well and with very solid earnings profiles.”
While LaCamp says the overall backdrop for stocks is constructive, he warns that sentiment itself may be the biggest risk.
“Overall, it’s a very good backdrop for stocks. One of my concerns is really just that the sentiment recognizes that and may not be factoring some things that might come from out of the blue.”
Disclaimer: Opinions expressed at CapitalAI Daily are not investment advice. Investors should do their own due diligence before making any decisions involving securities, cryptocurrencies, or digital assets. Your transfers and trades are at your own risk, and any losses you may incur are your responsibility. CapitalAI Daily does not recommend the buying or selling of any assets, nor is CapitalAI Daily an investment advisor. See our Editorial Standards and Terms of Use.