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More analysts are recommending “defensive” stocks over AI stocks as macro conditions change.
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Utilities, a classic defensive sector, are moving to compete with technology companies.
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Investors could benefit from non-tech growth companies, one analyst said, as some question the rising price of artificial intelligence.
Defensive recommendations have taken center stage on Wall Street as AI trading shows signs of overextension and economic conditions change.
Utilities stocks—a popular buy when times look tough—have performed similarly to the technology sector this year. Year-to-date, utilities and technology have gained 22.08% and 25.69%, respectively.
Defensive sectors of the stock market, which may also include real estate and consumer staples, tend to be better choices when macroeconomic conditions appear to be weakening. With employment data weak in recent months, investors are becoming concerned about the coming downturn.
Meanwhile, despite the sector’s comeback this week, leading AI names are struggling to find their footing, with Nvidia Companies are facing tough questions about returns on AI investments. The broader S&P Global Semiconductor Index fell 5.63% for the month.
With AI trading getting a brief reprieve, and data showing the economy may be slowing, more analysts are recommending investors take defensive positions in the stock market.
Bank of America said investors should avoid Buy Tech DipThe report noted that market volatility is set to increase in the long term. In addition to dividend-paying utility companies, the report also suggested that investors seek exposure to real estate.
Similar to Bank of America’s call, Morgan Stanley’s Mike Wilson called out AI last week. “overcooked” He said investors should shift to defensive stocks.
Some of the “most boring” companies in the S&P 500 are at the heart of the defensive theme, according to Brad Conger, chief investment officer at Hertle Callahan.
“Our position is that there are a lot of high-growth companies that are being undervalued because of the excitement around technology and AI,” Conger told Business Insider, citing things like waste management companies.
He added that the performance of such defensive names will rise significantly if the US economy witnesses a turnaround.
“That’s what we’ve seen in the last eight weeks – where the probability or likelihood of a recession went from 10% to 30%, and then these things got a tailwind.”
Like Morgan Stanley’s Wilson, Conger believes AI is overhyped, and warns that hardware companies like Nvidia risk falling off the cliff if the technology doesn’t start showing real returns on investment.
Companies from Black Rock to forefrontEveryone agrees that the timelines need to be adjusted. JPMorgan noted in a recent report that adoption trends need to move to a higher level if the technology hopes to avoid a “metaverse outcome,” referring to virtual reality worlds that saw huge investment a few years ago but ultimately failed to produce a significant return.
To be sure, most Wall Streeters remain convinced of the potential of AI. Eric Deaton of Wealth Alliance told BI that Nvidia’s recent decline was profit-taking rather than a sign of permanent weakness.
“We can’t imagine what it will look like ten years from now, but AI will become an essential part of everyone’s daily life. There’s no doubt about that,” the company’s CEO said.
But in line with what others have said, Deaton also hailed utility stocks as one of the good investments to make right now. As bullish as he may be on AI, he cautioned that the market has become too focused on tech powerhouses, and that investors need to diversify their investments.
“Do you need exposure to AI and technology? Sure. But do you want to do it the way the S&P 500 does?” he said. “No, you don’t. You don’t want to have 20% of your net worth in three stocks.”
With the Fed expected to cut interest rates at its meeting this week, Deaton also suggested that investors buy higher-yielding stocks and longer-term bonds. He also expressed a preference for small-cap companies, which can see stronger performance when borrowing costs fall.
Read the original article on Business Insider