'Take Profits' On Top AI Performers, Citigroup Analyst Says: Is The AI Sector Now In A Bubble?

A small group of artificial intelligence (AI) stocks played a large part in sending the S&P 500 to historic performance in 2024. While there are all-time highs and rapid share price appreciation in the AI play, some experts are skeptical that the rally can continue.

The AI Analyst: In a Monday note, Citigroup (Citi) analyst Drew Pettit told investors to “take profits” on AI amid top performers’ sky-high performance. Pettit’s takeaways were revealed in a Bloomberg report.

Main Takeaways: The analyst stated that while betting against AI "would be difficult for many on the buy-side," investors should rebalance portfolios away from the high-fliers and into AI companies trading cheaper. Pettit is particularly skeptical about chipmaker stocks’ continued performance.

A small number of AI stocks have roundly outperformed the S&P 500 and are heavily concentrated in the index; thus, the markets are now dependent on the AI play to continue its rally.

Pettit stopped short of labeling the AI rally as a “bubble.”

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

Goldman Sachs Weighs In: Citi’s relative pessimism on some AI companies comes amid other analysts’ comments on AI.

Jim Covello, the head of global equity research at Goldman Sachs, offered a warning on the AI play in June.

“AI technology is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn't designed to do," Covello said. “…In our experience, even basic summarization tasks often yield illegible and nonsensical results."

Price Action: Investors did not seem to heed Citi’s warning on Tuesday.

• Super Micro Computer Inc SMCI traded at $927.01, up 3.08%.
• NVIDIA Corp NVDA traded at $133.58, up 4.19%.
• Micron Technology Inc MU traded at $134.04, up 2.56%.
• Applied Materials, Inc AMAT traded at $250.01, up 1.51%.
• Roundhill Magnificent Seven ETF MAGS was up 1.09%.

(All share price data taken from the time of writing.)

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