AI Cool Down, Safety First: Analysts Recommend Defensive Stocks
As AI trading shows signs of overheating and economic conditions shift, defensive investments are gaining attention on Wall Street.
Utility stocks have surged this year, performing strongly and now rivaling tech stocks. So far, utilities and tech sectors have risen 22.08% and 25.69%, respectively.
Is AI Boom Overhyped?
In times of economic weakness, defensive sectors like real estate and consumer often outperform. Recent disappointing U.S. employment data and signs of a cooling economy have led investors to worry about a possible recession. As a result, more analysts are advising a shift toward defensive investments.
Meanwhile, AI trading has cooled, with chip stocks struggling. The S&P Global Semiconductor Index has dropped 5.63% this month. Despite this, Bank of America advises against buying falling tech stocks and expects increased market volatility. Besides dividend-paying utilities, the bank also suggests focusing on real estate.
Mike Wilson of Morgan Stanley echoed this sentiment last week, saying the AI boom is "overhyped" and recommending a move toward defensive stocks.
Brad Conger, CIO at investment firm Hirtle Callaghan, pointed out that some “boring” companies within the $S&P 500(.SPX)$ are at the core of defensive investing. He noted that the hype around tech and AI has led to the undervaluation of solid growth stocks, such as waste management companies.
Conger added that the probability of a U.S. recession has risen from 10% to 30% over the past eight weeks. If the economy does turn, these defensive stocks are likely to shine. Like Wilson, Conger believes AI is overheated and warns that if investments in AI technology fail to deliver real returns, hardware companies like $NVIDIA Corp(NVDA)$ could see their stock prices tumble.
From BlackRock to Vanguard, many firms agree that adjustments are needed. JPMorgan's recent report suggested that for AI to avoid the “metaverse outcome,” its adoption needs to accelerate. The metaverse attracted massive investments but ultimately delivered little return.
AI Potential
Still, many on Wall Street remain optimistic about AI's potential. Eric Diton, President of Wealth Alliance, views Nvidia's recent dip as profit-taking rather than a sign of ongoing weakness.
He firmly believes that AI will become an integral part of daily life in ten years, with immense current potential. Despite this, Diton now recommends utility stocks, noting that the market's focus on tech giants means investors need diversification.
Additionally, with expectations that the Fed will announce a rate cut at its upcoming meeting, Diton suggests buying high-dividend stocks and long-term bonds. He also favors small-cap stocks, as they might perform better when borrowing costs decrease.
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