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More and more analysts are recommending “defensive” stocks over AI stocks as macro conditions change.
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Utilities, a classic defensive sector, are competing with technology.
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With some questioning the AI rally, investors could benefit from non-tech growth companies, an analyst said.
Defensive recommendations are taking center stage on Wall Street as artificial intelligence trading shows signs of overload and economic conditions change.
Utility stocks – a common buy when times look tough – have kept pace with the technology sector’s tremendous performance this year. Year-to-date, the utility and technology sectors are up 22.08% and 25.69%, respectively.
Defensive sectors of the stock market, which can include real estate and consumer staples, are generally better suited when macro conditions appear to be softening. As employment data have deteriorated in recent months, investors are becoming increasingly nervous about a coming recession.
While the sector has made a comeback this week, leading AI names have struggled to find their footing Nvidia face tough questions about the return on AI investments by companies. The broader S&P Global Semiconductor Index is down 5.63% this month.
As AI trading takes a breather and data suggests the economy may be cooling, more and more analysts are urging investors to take shelter in defensive corners of the stock market.
Bank of America said investors should avoid this buying the tech dipnoting that market volatility will increase in the long term. In addition to dividend-paying utilities, it also suggested that investors would look for exposure to real estate.
Similar to BofA’s call, Morgan Stanley’s Mike Wilson mentioned the AI theme last week “overcooked” and said investors should switch to defensive stocks.
According to Brad Conger, CIO of investment firm Hirtle Callaghan, some of the more “boring” companies in the S&P 500 are at the heart of the defensive theme.
“Our positioning is that there are a lot of large growth companies that are undervalued because of both the excitement around technology and AI,” Conger told Business Insider, citing things like waste management companies.
The performance of such defensive names would rise dramatically if the U.S. economy took a turn, he added.
“That’s what we’ve seen over the last eight weeks: as the prospect or possibility of a recession has gone from, say, 10% to 30%, those things have gotten a tailwind.”
Like Morgan Stanley’s Wilson, Conger believes AI is overloaded and warned that hardware companies like Nvidia face a cliff if the technology doesn’t start to deliver real returns on investment.
Companies, from BlackRock Unpleasant Forefrontagree that timelines need to be adjusted. JPMorgan noted in a recent report that adoption trends must move higher if the technology hopes to avoid a “metaverse outcome,” referring to the virtual reality worlds that saw huge investments in them a few years ago but ultimately never delivered much return. .
It’s fair to say that most on Wall Street are still convinced of AI’s potential. Wealth Alliance’s Eric Diton told BI that Nvidia’s recent decline was a case of profit-taking and not a sign of lasting weakness
“We can’t imagine what this will look like in ten years, but AI will become a mainstream part of everyone’s daily lives,” he said. “There is no doubt in my mind.”
But in line with what others had said, Diton also praised that utilities are a meaningful investment we can make now. As optimistic as he is about AI, he warned that the market has become extremely concentrated in the leading names of technology, and that investors need to diversify.
“Do you need to be exposed to AI and technology? Absolutely. But do you want to do it like the S&P 500 does?” he said. ‘No, you don’t want that. You don’t want to have twenty percent of your assets and three shares.’
With the Federal Reserve expected to cut rates at its meeting this week, Diton also suggested that investors should pick up high-dividend stocks and longer-dated bonds. He also shared a preference for small caps, which can outperform as financing costs fall.
Read the original article Business insider