BofA Global Research strategists have been beating the drum: It is time to take a rain check on the big artificial intelligence bets and instead stick with all-weather investments.
That’s a bold call. An investor who put $100,000 in the Roundhill Magnificent Seven exchange-traded fund, which tracks Alphabet, Amazon, Nvidia, Netflix, Tesla, Apple and Microsoft, made about $55,000 over the past year. In contrast, the same investor in the S&P 500 index fund made just over half of that.
Sticking with the tech behemoths paid off thanks to the excitement on artificial intelligence, the latest technology to fuel hopes for widespread productivity gains. BofA says the buck stops here.
“The AI hype has peaked and real economy sectors are due for a decade of catch-up,” BofA’ Jared Woodard recently wrote.
Over the past 10 years, 48% of the S&P 500’s market value gain came from the Magnificent Seven stocks, excluding Tesla that entered the index in 2020. In 2024, with Tesla, so far the Mag Seven accounted for 52.5% of the gain, Dow Jones market data team calculates.
But now, there are concerns whether the returns from AI will outweigh the costs that underpin the technology, such as the data centers and associate hardware. Alphabet nearly doubled its spending in the last quarter and Meta raised its forecast for the year.
Expectations for earnings growth for average AI ETFs, like the Global X Artificial Intelligence & Technology, over the next year is falling, BofA said in a July 16 note and reiterated it on Friday. It’s approaching the 13% forecast for the S&P 500 this year and BofA’s Savita Subramanian has said this could benefit the other 493 stocks in the S&P 500.
BofA screened for a group of stocks that have outperformed the S&P 500 year to date and in the last three, five, and 10 years—and picked its Buy rated names with a balance growth and value exposure, as defined by FactSet.
In the consumer discretionary sector, the screen identified auto parts stock O’Reilly Automotive $(ORLY)$ and home construction stock NVR, which have gained 18% and 26.5% respectively this year. In financials, the screen picked out Progressive $(PGR)$, KKR $(KKR)$, and Arch Capital Group $(ACGL)$. BofA likes these two sectors.
BofA is underweight the overall tech sector in its portfolio as well as consumer staples, and healthcare. But the screen flagged Costco Wholesale $(COST)$ within consumer staples while Vertex Pharmaceuticals $(VRTX)$ and HCA Healthcare $(HCA)$ were picked out in healthcare. Analog Devices $(ADI)$ and Amphenol were the tech names.
Vulcan Materials was the only materials stock. In industrials, it highlighted Eaton $(ETN)$, Cintas $(CTAS)$, and Parker-Hannifin $(PH)$. When the Federal Reserve cuts interest rates, it would be fair to assume that companies within materials and industrials sector, which typically rely on borrowing for growth, can benefit.
The stock market has done well so far this year. The S&P 500 looking to finish with double-digit gains, despite recession earnings, a mini banking crisis, and the latest selloff. Sticking with a broad index has historically outperformed picking individual stocks. Investors should focus on company fundamentals and their own ability to take risks before choosing individual names.