Wall Street analysts are sounding the alarm on the recent frenzy surrounding artificial intelligence stocks, advising investors to resist the allure of high-risk AI plays. Instead, they recommend a pivot toward defensive stocks, highlighting companies with steady growth, reliable dividends, and solid balance sheets. As market volatility rises and uncertainty looms, these stable performers are seen as a safer bet to weather any potential storms ahead.
Defensive sectors, including real estate and consumer staples, often outperform when macroeconomic conditions soften. Recent weakening in employment data has intensified concerns among investors about an impending economic downturn. Despite a brief recovery this week, leading AI stocks, such as Nvidia, are grappling with doubts about the profitability of AI investments. The S&P Global Semiconductor Index is down 5.63% for the month, reflecting broader challenges in the tech space.
As data increasingly hints at a cooling economy, more analysts are advising a shift toward defensive areas of the market. Bank of America has cautioned against buying the dip in tech stocks, highlighting that market volatility may persist in the long term. In their latest guidance, BofA recommended increasing exposure to dividend-paying utilities and real estate assets. This aligns with Morgan Stanley’s Mike Wilson, who recently called the AI-driven rally “overcooked” and advised reallocating funds into more defensive shares.
Brad Conger, CIO of Hirtle Callaghan, underscores that some of the S&P 500’s more “boring” stocks are currently central to this defensive strategy. “There are a lot of great growth businesses that are undervalued because of the current excitement around tech and AI,” Conger noted in an interview, referencing industries such as waste management. He further argued that if the U.S. economy were to deteriorate, these defensive stocks would likely see significant gains.
The market’s recent behavior supports Conger’s perspective. “In the past eight weeks, as recession probabilities have increased from around 10% to 30%, defensive stocks have caught a tailwind,” he added. Similar to Wilson, Conger remains cautious on AI, warning that companies like Nvidia could face severe setbacks if AI investments don’t begin to deliver tangible returns.
Major firms such as BlackRock and Vanguard have echoed the sentiment that AI timelines may need reassessment. A recent JPMorgan report stressed that adoption rates for AI must accelerate to avoid a scenario similar to the “metaverse”—a once-hyped tech trend that failed to produce substantial returns.
Yet, despite the growing calls for caution, many on Wall Street remain bullish on AI’s potential. Eric Diton of Wealth Alliance downplayed Nvidia’s recent dip, attributing it to profit-taking rather than a fundamental weakness. “We can’t imagine exactly what AI will look like in 10 years, but it will undoubtedly become a mainstream part of everyday life,” Diton stated. However, he also warned that tech’s dominance has led to market overconcentration, and advised diversification.
“You absolutely need exposure to AI and tech,” Diton said, “but not in the way the S&P 500 is structured. You don’t want 20% of your net worth tied up in just three stocks.”
Looking ahead, Diton suggests positioning portfolios for potential rate cuts from the Federal Reserve, anticipated at its meeting this week. He recommends high-dividend-paying stocks, longer-term bonds, and small-cap stocks, which could benefit from lower borrowing costs.
