Wall Street analysts are increasingly recommending defensive stocks over artificial intelligence plays as market conditions shift. Utilities, a traditionally defensive sector, have been performing on par with the tech sector this year. Year-to-date, utilities have gained 22.08% compared to tech’s 25.69% increase.
Defensive sectors, which include utilities, real estate, and consumer staples, tend to outperform during economic downturns. Recent weakening in employment data has raised concerns about a potential economic slowdown, prompting investors to consider more conservative options.
Meanwhile, leading AI companies have faced challenges recently, with Nvidia encountering questions about returns on AI investments. The broader S&P Global Semiconductor Index has dropped 5.63% this month, despite a slight recovery this week.
As the AI trade experiences a lull and economic indicators suggest cooling, more analysts are advising investors to seek refuge in defensive areas of the stock market. Bank of America has cautioned against buying the tech dip, predicting increased market volatility in the long term. The bank recommends dividend-paying utilities and real estate exposure.
Morgan Stanley’s Mike Wilson echoed this sentiment, describing the AI theme as “overcooked” and suggesting a shift towards defensive shares. Brad Conger, CIO of Hirtle Callaghan, highlighted the potential of “boring” S&P 500 companies, such as waste management firms, which he believes are undervalued due to the excitement surrounding tech and AI.
Conger noted that these defensive stocks could see significant gains if the US economy takes a downturn. He observed that in the past eight weeks, as recession probability increased from 10% to 30%, these stocks gained momentum.
Like Wilson, Conger believes AI is overstretched and warned that hardware companies like Nvidia could face challenges if the technology fails to demonstrate real returns on investment. Other firms, including BlackRock and Vanguard, agree that timelines need
adjustment. JPMorgan cautioned that AI adoption trends must accelerate to avoid a “metaverse outcome,” referencing the disappointing returns from virtual reality investments.
However, many on Wall Street remain optimistic about AI’s potential. Eric Diton of Wealth Alliance attributed Nvidia’s recent drop to profit-taking rather than underlying weakness. He expressed confidence that AI will become an integral part of daily life within a decade.
Despite his bullish stance on AI, Diton also recommended utilities stocks as a valuable investment. He warned against over-concentration in leading tech names, emphasizing the need for diversification. “Do you need to have exposure to AI and tech? Absolutely. But do you want to do it in the way the S&P 500 is?” he questioned, cautioning against having 20% of one’s net worth in just three stocks.
With the Federal Reserve expected to cut interest rates, Diton suggested investors consider high-dividend paying stocks and longer-term bonds. He also expressed a preference for small-cap stocks, which tend to perform well when borrowing costs decrease.
As the market landscape evolves, investors are faced with the challenge of balancing the potential of AI investments with the stability offered by defensive stocks. While AI continues to generate excitement, the growing emphasis on defensive plays suggests a shift in sentiment among analysts and investors alike.