Bank of America’s August survey has confirmed that fears of an AI bubble are growing on Wall Street.
About 32% of fund managers suggest that an AI bubble is the biggest risk to markets, even bigger than the current geopolitical turmoil and the inflation risk.
Yet paradoxically, the bets on semiconductor stocks, once the most crowded trade, have fallen sharply from 82% to 53% in just one month. This suggests that smart investors might have already started moving away from AI stocks as talk of a bubble grows.
So, where is this money moving?
According to the survey, investors are increasingly shifting towards defensive, value and cyclical stocks, and slowly moving away from high-flying AI trade
About 59% of fund managers are now turning to value, cyclical, and defensive sectors to reduce their exposure to a potential AI downturn, more than twice the share recorded in July.
The survey further notes that nearly two-thirds of investors said they need clearer evidence of AI monetisation before adding more exposure to AI-related stocks.
European stocks over US peers
As AI spending surges, investors are increasingly turning to European stocks over US peers, drawn by the region’s stronger economic outlook.
About 47% of fund managers in a Bank of America Corp. survey expect returns on European stocks to modestly outpace those in the US over the coming year, the highest level since before the Iran war began in February.
The bullish view is underpinned by about 97% of participants saying they don’t expect a European recession, the highest reading since 2007. Meanwhile, more than three-quarters said further stock gains will be driven mainly by earnings upgrades.
“We’re revisiting the pro-Europe theme from the start of the year, which was crudely stopped by the Iran war,” says Andreas Bruckner, a BofA strategist.
India least favoured in Asia
India has replaced Indonesia as Asia’s least-preferred stock market in a survey of fund managers by Bank of America Corp., signalling growing caution toward a market that’s among the world’s worst performers this year.
The lack of a clear AI exposure remains the key concern for Indian equities, with weak growth emerging as the next most important risk, according to the survey, which showed 32% of the respondents were net underweight on the nation. Lack of reforms and high valuations also emerged as reasons for the bearish outlook on Asia’s fourth-largest equity market.
In contrast, sentiment improved in Indonesia, with 27% of fund managers reporting being net underweight on the market, down from 32% in July. Taiwan and Japan remain the most preferred regions for investors. A total of 98 panellists with $272 billion of assets responded to the survey’s questions between 7 August and 13 August.
