I. From Digital Back To Analog
The “AI Immunity Trade” has caused more casualties in the stock market. It started with selloffs in software and private credit stocks at the beginning of the year. Since then, it has hit wealth managers, insurance brokerage, tax preparation, accounting services, professional data, and legal research. Today, it pummeled office REITs, trucking, and logistics stocks.
Investors are scrambling to get out of the digital world and back to the analog, physical world, which is less likely to be disrupted by AI. Who knew that office buildings and trucking had become so digital? The result is that portfolios are rebalancing away from Information Technology, Communication Services, and Financials and toward Consumer Staples, Energy, Health Care, and Industrials.
We think that the AI Immunity Trade is getting overdone, especially in the Financials sector. Many of the trade’s stock market casualties will survive and boost their productivity and profits using AI. However, AI is a disruptive technology causing lots of known unknowns about its ultimate impact on the earnings and the earnings growth of companies likely to be disrupted.
Nevertheless, we are still targeting 7700 for the S&P 500 index by the end of this year. We are dropping our overweight recommendation on Financials to market weight, while maintaining our overweights on Health Care, Industrials, and Materials (as of yesterday). We are glad that we advised underweighting the Magnificent-7 and overweighting overseas stocks in early December last year.
