BofA's Hartnett says artificial intelligence (AI) is a 'baby bubble' for now

The highlight of the stock market in 2023 has been ‘The Magnificent Seven’ i.e. the surge in shares of the mega-cap tech stocks, Bank of America’s Michael Hartnett writes in his regular weekly column.

The Big 7 monopolistic U.S. Tech stocks - Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Google (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), Nvidia (NASDAQ: NVDA), Meta Platforms (NASDAQ: META), and Tesla (NASDAQ: TSLA) - are up 61% year-to-date. The group trades on 30x PE vs 17x for the rest of the S&P 500.

A similar situation can also be observed in Europe where a group of 7 luxury stocks trades on 36x vs the rest of Stoxx 600 trading on 12x PE.

One of the key drivers of the tech rally in 2023 has been the artificial intelligence (AI) frenzy and the popularity of generative AI tools, like OpenAI’s ChatGPT. Hartnett says AI is in a “baby bubble” so far.

“Bubbles in right things (e.g. internet) & wrong things (e.g. housing) always started by easy money, always ended by rate hikes,” the analyst said in a note on Friday.

Hartnett says the Fed funds rate at 6%, not at 3%, could be the ‘pain trade’ for the next 12 months as the market continues to expect rate cuts in the second half of 2023. In the near term, the S&P 500 extending its rally to 4400 could be another ‘pain trade.’

“We still fade SPX 4.2k…$220 EPS + 20x PE + 200bps Fed cuts = “as good as it gets”; but clients so bored of bears,” Hartnett added.

As far as flows are concerned, $25.1 billion went to cash and $5.6B to bonds in the week to Wednesday.

By Senad Karaahmetovic

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