Utilities stocks — popular buys when the weather looks tough amid market risks — have performed similarly to the technology sector this year.
Since the beginning of the year until now, the public utilities sector and the technology sector have achieved gains of 22.08 percent and 25.69 percent, respectively, according to a report by Business Insider that Sky News Arabia Economy has reviewed.
Defensive sectors in the U.S. market, which may also include real estate and consumer staples, tend to be better choices when macroeconomic conditions appear weak. With weak employment data in recent months, investors are becoming concerned about the coming downturn.
Meanwhile, despite the sector’s resurgence this week, leading AI names are struggling to find their footing, with Nvidia facing tough questions about returns on AI investments by companies. The broader S&P World Semiconductor Index fell 5.63 percent for the month.
With AI trading taking a short break, and data showing the economy may be slowing, more analysts are recommending investors take defensive positions in the stock market.
Bank of America said investors should avoid buying technology stocks, noting that market volatility is set to increase over the long term. In addition to dividend-paying utilities, the bank also suggested investors seek exposure to real estate.
Similar to Bank of America’s call, Morgan Stanley’s Mike Wilson last week called AI “overhyped,” and said investors should shift to defensive stocks.
Some of the “most boring-looking” companies in the S&P 500 are in the defensive heartland, according to Brad Conger, chief investment officer at Hertle Callahan.
“Our position is that there are a lot of high-growth companies that are being undervalued because of the excitement around technology and artificial intelligence,” Conger said in remarks quoted by the website, citing companies such as waste management companies. “The performance of defensive names like these will rise significantly if the U.S. economy turns around.”
Like Morgan Stanley’s Wilson, Conger believes AI is overhyped, and warns that hardware companies like Nvidia risk falling off the cliff if the technology doesn’t start showing real returns on investment.
JPMorgan noted in a recent report that adoption trends need to move to a higher level if the technology hopes to avoid a “metaverse outcome,” referring to virtual reality worlds that saw massive investment a few years ago but ultimately didn’t produce a significant return.
According to the report, most Wall Streeters are still convinced about the potential of AI. Eric Deaton of Wealth Alliance said that Nvidia’s recent decline was a case of profit taking, not a sign of permanent weakness.
“We can’t imagine what it will look like ten years from now, but AI will become an essential part of everyone’s daily life. There’s no doubt about that,” the company’s CEO said.
But in line with what others have said, Deaton also hailed utility stocks as one of the good investments to make right now. As bullish as he may be on AI, he cautioned that the market has become too concentrated on leading tech names, and that investors need to diversify their investments.
With the Fed expected to cut interest rates at its meeting this week, Deaton also suggested that investors buy higher-yielding stocks and longer-term bonds. He also expressed a preference for small-cap companies, which can see stronger performance when borrowing costs fall.
Artificial intelligence is hard to resist.
For her part, financial markets expert Hanan Ramses told Sky News Arabia Economy that:
- The lure of investing in AI stocks is hard to resist.
- But focusing on one type of stock (a particular sector) is not always the best option for investors.
- Investors usually seek to diversify their investments, looking for the most acceptable and in-demand stocks in the markets, which explains their tendency towards those that witness significant price jumps.
- This trend may carry great risks if not dealt with carefully. It is necessary for the investor to develop himself continuously and not stand still.
Ramses pointed out that the main goal of every trader in the stock market is to make a profit and protect his money from the risks of inflation, which is what drives some to resort to investing in the shares of artificial intelligence companies that require close monitoring and continuous evaluation in light of the booms they are witnessing.
She also explained that emerging companies in this sector face major challenges; they may achieve huge price jumps, but their balance sheets do not necessarily reveal their ability to continue and sustain momentum, which exposes investors to additional risks if they rely heavily on technical analyses without considering fundamental and financial analyses.
In a related context, she added that technology companies are greatly affected by news, whether positive or negative, which may affect their performance in the short term, even if the long-term prospects for these companies are promising.
Ramses concluded her remarks by saying that investors should be keen to diversify their investments and reduce risks by benefiting from their previous experience in the field of investment, and searching for promising investment opportunities in the artificial intelligence sector, which holds great prospects for growth but with challenges that must be taken into consideration.
Growth stocks..the winning horse
In this context, the Managing Director of IDT Consulting and Technology Systems, Mohammed Saeed, pointed out that:
- The best strategy for investors, in his opinion, is to focus on growth stocks during periods of market upswings.
- These stocks tend to have the highest profit rates at such times.
- While investors in downturns prefer to move towards defensive stocks that are characterized by less volatility, which contributes to reducing losses and maintaining stable profits.
“So far, it does not appear clear that the (US) market is going through a downturn, although there are some doubts about the general direction. I personally tend to believe that the market may witness a decline, but the Federal Reserve’s interest rate cuts and monetary easing may enhance the positive performance of the markets in the near term,” he added.
He explained that reducing interest rates is usually considered a positive step for investments in financial markets, but the actual impact may differ from what is theoretically expected, especially with the large increases that the market has recently witnessed.
Saeed said that the positive response of the markets to the interest rate cut could be short-lived before it declines again. He expressed doubts about the market’s continued strong performance in the near future, contrary to what some expect.
In a related context, he pointed out that the market had achieved record levels until the end of last week. However, if investors feel that there are possibilities of a decline, they are expected to move towards defensive stocks.
He pointed out that technology companies have performed well in the previous period, and are likely to continue leading the market when the rise resumes.
“We may see a temporary shift towards defensive stocks in the coming period, as seen in the movements of Warren Buffett’s Berkshire Hathaway portfolio, which has begun to exit large stocks such as Apple. However, this trend cannot be considered a comprehensive phenomenon in the market,” he added.
“We must take into account that the upcoming US presidential elections add a significant element of uncertainty to the future of the market, as the candidates’ policies differ. All these factors make the market uncertain, but the positive performance witnessed by the market on Thursday and Friday indicates that investors are currently optimistic,” Saeed concluded.
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