Resist the temptation of AI and bet on safe defensive stocks, say Wall Street analysts

• Several analysts are recommending “defensive” actions against AI plays as macro conditions change.

• Utilities, a classic defensive sector, are moving ahead with technology.

• With some questioning the AI ​​rally, investors could benefit from non-tech growth companies, one analyst said.

Defensive recommendations have taken center stage on Wall Street as AI trading shows signs of being overextended and as economic conditions change.

Utility stocks — a common buy when times seem tough — have faced the tech sector’s breakout performance this year. Year-to-date, the utilities and technology sectors are up 22.08% and 25.69%, respectively.

Defensive sectors of the stock market, which can also include real estate and consumer goods, tend to do better when macro conditions appear to be softening. As employment data has weakened in recent months, investors are growing nervous about a coming recession.

Meanwhile, while the sector bounced back this week, leading names in AI have struggled to find their footing, with Nvidia facing tough questions about the return on companies’ AI investments. The broader S&P Global Semiconductor Index is down 5.63% this month.

As AI trading takes a breather, and as data shows the economy may be cooling, several analysts are recommending investors take refuge in the defensive corners of the stock market.

Bank of America said investors should avoid buying the tech dip, noting that market volatility will increase over the long term. In addition to dividend-paying utilities, he also suggested investors look for real estate exposure.

Similar to BofA’s call, Morgan Stanley’s Mike Wilson last week called the AI ​​theme “ready” and said investors should move to defensive stocks.

According to Brad Conger, CIO of investment firm Hirtle Callaghan, some of the S&P 500’s most “boring” companies are at the heart of the defensive theme.

“Our position is that there are a lot of high-growth businesses that are undervalued both because of the excitement around technology and because of AI,” Conger told Business Insider, citing things like waste management companies.

The performance of such defensive names would increase 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 recession went from, say, 10 percent to 30 percent, then those things got a tailwind.”

Like Morgan Stanley’s Wilson, Conger believes artificial intelligence is overhyped and has warned that hardware firms like Nvidia face a cliff if the technology doesn’t start to show real returns on investment.

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Firms from BlackRock to Vanguard agree the timelines need to be adjusted. JPMorgan noted in a recent report that adoption trends need to go higher if the technology hopes to avoid a “metaverse outcome,” referring to the virtual reality worlds that saw huge investment a few years ago, but which ultimately the latter never came to produce a large profit. .

To be sure, 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 understand what this will look like in 10 years, but AI will become a main part of everyone’s daily life,” said the company’s president. “There is no doubt in my mind.”

But echoing what others had said, Diton also said utility stocks are a significant investment to make right now. As optimistic as he is about AI, he cautioned that the market has become highly concentrated in top tech names and investors need to diversify.

“Do you need to be exposed to artificial intelligence and technology? Absolutely. But do you want to do it the way the S&P 500 is?” he said. “No, you don’t. You don’t want to have 20% of your net worth and three stocks.”

With the Federal Reserve expected to cut interest rates at its meeting this week, Diton also suggested investors pick up high-dividend stocks and longer-dated bonds. He also shared a preference for small caps, which can see stronger performance when borrowing costs fall.

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