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Explosive Growth in AI Stocks Could Lead to Massive Sell-Offs – Here’s Why
Amidst a sharp drop in Nvidia’s stock value, Bank of America analysts issue a warning about the risks surrounding the company and the broader artificial intelligence (AI) ecosystem. A potential selloff in Nvidia stock and other AI-related equities looms as investors grow impatient despite strong returns. This poses a significant threat as only a few AI stocks are driving a large portion of the market’s performance.
According to a CNBC report, BofA’s strategist Jared Woodard predicts profit-taking in mega-cap tech companies in the second half of the year. Investors may become restless for a groundbreaking AI application or more substantial growth, leading to potential market instability. Woodard highlights that just four AI stocks have accounted for half of the market’s profits since 2021.
Woodard also points out concerns with the narrow U.S. market rally, emphasizing the shaky foundation built on extended capex cycles and calm capital. Earnings growth projections for AI stock ETFs have dropped significantly, making investors uneasy about the future.
One of the main risks for Nvidia stock is the devaluation of older investments with each new product release. While the company’s computing power is widely recognized, doubts may arise about its near-term economic prospects after a frenzy around new chips.
Nvidia Stock Faces Historical Challenges
Despite the concerns, analysts remain bullish on Nvidia stock, with a consensus rating of strong buy and an average price target suggesting a 19% upside potential. However, the stock has seen a recent decline after significant gains earlier in the year, raising questions about its ability to meet escalating expectations.
Woodard compares the current AI hype to past technological booms that saw delayed returns on investment, cautioning investors about potential bubbles. Instead of chasing high-flying AI stocks, BofA recommends exploring undervalued opportunities in small-cap value stocks, utilities, energy infrastructure, and banking institutions.
Overall, investors should approach the AI market with caution and consider diversifying their portfolios to mitigate risks associated with the sector’s rapid growth and potential market volatility.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor held a LONG position in NVDA.