Investors are riding the artificial intelligence (AI) wave, and tech stocks are reaping the benefits. As reported by Bloomberg, according to Bank of America Corp., a "baby bubble" in AI was the hot market theme in May.
Record Tech Investments
With an all-time high of $8.5 billion attracted to tech funds in just one week through May 31, the trend is clear. Based on numbers from EPFR Global, the data signals the role of "monopolistic tech" in the financial landscape. According to strategist Michael Hartnett, it's a world where pricing power and a squeeze on smaller suppliers make the rules.
- JPMorgan Chase uses a ChatGPT AI-like model to decipher trading signals
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- Musk's Twitter forays into finance, allows users to trade stocks, crypto
The success is tangible, too. The Nasdaq 100 Index is now at a record high compared to the Russell 2000 small-cap index. As a result, Hartnett believes there might be a contrarian trade brewing. The strategy? Sell AI and buy Hong Kong shares.
Investment isn't just flowing to tech stocks. Global equity funds also saw a considerable influx, scoring $14.8 billion. Bond funds have also seen a healthy gain, taking in $1.1 billion.
It's no surprise, then, that tech stocks are surging. They've grown by 32% this year, thanks to bets that the Federal Reserve will halt rate hikes and that the sector will be relatively unaffected by any future recession.
AI-related stocks have enjoyed particular favor, pushing Nvidia Corp.'s market capitalization to hit $1 trillion briefly. And remember Apple Inc., which is teasing record highs again.
AI 'Baby Bubble
But there's a catch. The enthusiasm of the rally is starting to raise eyebrows. The Nasdaq 100's relative strength index is now north of 70, which some see as an overbought signal and potential precursor to a selloff. This is what experts are calling a "baby bubble."
A "baby bubble" in the context of investments refers to a surge in investment activity centered around a specific industry or technology that is rapidly growing, in this case, artificial intelligence (AI). It's called a "baby bubble" because while the influx of investments might inflate the perceived value of the sector, much like a bubble, it's still in its early stages or "baby" phase. This term usually carries a cautionary tone, as bubbles, even at their nascent stage, might burst if the technology or industry doesn't live up to the hype or if the investment pace is unsustainable, leading to potential financial loss for investors.
Long positions in Nasdaq 100 futures have also reached a three-year peak, amplifying the risk of a market plunge. Citigroup Inc. strategists flagged this earlier in the week.
In light of recent data showing a higher-than-expected rise in US payrolls for May, Nasdaq 100 futures faced some pressure on Friday. This development could compel the Fed to keep rates high.
For those wondering what BofA's Hartnett makes of it all, he's bearish about stocks overall. However, despite the buzz around AI, he sees tightening financial conditions and the pulling-away from AI as a short-sighted move.
