Time to take profits in high-flying AI equities, says Citi

The rally in artificial intelligence stocks may show little sign of flagging, but a historical review suggests it’s time to take profit in the biggest names, according to strategists at Citigroup.

Sentiment towards AI-exposed equities is the strongest since 2019 and free cash flow at the bulk of those firms is forecast to outstrip analyst expectations, according to the Citi team led by Mr Drew Pettit.    

Readings like that typically suggest “significantly more volatility” is on the way. And while there may be no signs of an overall price bubble, the rally in some names is “concerning”, they said.  

The buzz around AI has powered stocks to record highs this year. Nvidia Corp briefly became the world’s most valuable company and Asian chip-making giant Taiwan Semiconductor Manufacturing at one point crossed US$1 trillion (S$1.35 trillion) in market capitalisation. 

“We continue to suggest investors take profits in AI highfliers”, in particular the chipmakers, Mr Pettit and colleagues wrote in a note dated July 8. Investors should “re-balance towards a broader array of AI stocks across the value chain”, they said. 

Still, some money managers say the AI buzz won’t fade in the second half of the year. 

Over a dozen investors and market strategists interviewed by Bloomberg News were split between bets on mega-caps such as Nvidia remaining at the forefront, and secondary benefactors including utilities and infrastructure providers taking the lead.

Not owning or betting against AI “would be difficult for many on the buy-side”, the Citi strategists conceded.  

“Our estimates suggest stock prices imply lofty expectations, but long-run consensus estimates suggest most are attainable,” they said. “Essentially, sentiment is very optimistic, but still seems shy of a full-blown bubble.” BLOOMBERG