TL;DR:
- Investors are pouring record amounts of money into tech stocks driven by the buzz around artificial intelligence (AI).
- Tech funds attracted a historic high of $8.5 billion in the last week of May, according to Bank of America.
- “Monopolistic tech” is gaining dominance through pricing power and squeezing smaller suppliers.
- Global equity funds received a significant influx of $14.8 billion, while bond funds saw $1.1 billion in investments.
- Tech stocks have surged 32% this year, with optimism around AI-related stocks providing an additional boost.
- However, concerns are rising about technical indicators and market positioning, with the Nasdaq 100 showing signs of overbought conditions.
- US payroll data exceeding expectations put pressure on the Federal Reserve to maintain higher interest rates.
- Bank of America remains bearish on stocks overall due to the prospect of tightening financial conditions.
Main AI News:
The tech sector is experiencing a remarkable influx of capital as investors flock to artificial intelligence (AI) opportunities, setting new records in funding, reports Bank of America Corp. Michael Hartnett, a strategist at the bank, identifies a prevailing “baby bubble” in AI as the driving force behind this market trend. In the last week of May alone, tech funds attracted an unprecedented $8.5 billion, as revealed by EPFR Global data cited by the bank.
Hartnett emphasizes the dominance of “monopolistic tech,” which is leveraging its pricing power and exerting pressure on smaller suppliers. Illustrating this point, he highlights the Nasdaq 100 Index, which has reached a historical high compared to the Russell 2000 small-cap index. In light of this, Hartnett suggests that a contrarian move at this juncture would involve divesting from AI and investing in Hong Kong shares.
The data further reveals that global equity funds have experienced a substantial inflow of $14.8 billion, with an additional $1.1 billion directed toward bond funds. This surge in investment is fueled by a combination of factors. Firstly, the tech sector has enjoyed a 32% surge this year, driven by optimism that the Federal Reserve will halt interest rate hikes and the belief that tech companies will be more resilient in the face of an anticipated economic downturn. Additionally, the enthusiasm surrounding AI-related stocks has provided an extra boost, propelling Nvidia Corp.’s market capitalization to briefly touch the $1 trillion mark, while Apple Inc. remains close to its all-time highs.
However, the rapid ascent of tech stocks has started to raise concerns regarding technical indicators and market positioning. The relative strength index of the Nasdaq 100 has surpassed the 70 thresholds, indicating an overbought condition that could precede a market downturn. Furthermore, long positions in Nasdaq 100 futures have reached a three-year high, heightening the risk of a market sell-off, as cautioned by Citigroup Inc. strategists earlier this week.
The market sentiment shifted on Friday as Nasdaq 100 futures pared gains following the release of US payroll data for May, which exceeded expectations. This development puts pressure on the Federal Reserve to maintain higher interest rates.
Hartnett, the strategist at BofA who accurately predicted the stock market decline in 2022, maintains a bearish outlook on stocks in general due to the potential tightening of financial conditions.
Conclusion:
The surge in AI-related investments and the subsequent boost in tech stocks indicate a growing appetite for innovation and technological advancements. The dominance of “monopolistic tech” and the influx of capital into the sector suggest that investors believe in the long-term potential of AI. However, the rapid ascent of tech stocks and concerns about overbought conditions raise cautionary flags. The market’s reaction to US payroll data underscores the sensitivity to economic indicators. With Bank of America maintaining a bearish outlook on stocks due to tightening financial conditions, it is important for investors to carefully monitor the market and consider potential risks amidst the AI frenzy.
