Fund managers say an AI bubble is now the biggest risk to their portfolios — but it's not enough to stop them betting on stocks

Bank of America's latest Global Fund Managers Survey indicates that an AI equity bubble is now considered the biggest market tail risk by one-third of polled managers, marking the first time this concern topped the list, with over 50% believing AI stocks are already in a bubble. Despite these escalating concerns and a record 60% viewing global stocks as overvalued, fund managers are the most net overweight on equities since January, suggesting that the pursuit of returns is currently outweighing perceived risks. Experts note the rally is largely sentiment-driven, though some argue current valuations are still supported by strong earnings, preventing a full-blown bubble for now.

Analysis

The latest Bank of America Global Fund Managers Survey (October 3-9) indicates that an artificial intelligence (AI) equity bubble is now considered the biggest market tail risk, identified by one-third of polled managers overseeing $400 billion in assets. This marks the first time an AI bubble has topped the risk list, with over 50% of managers believing AI stocks are already in a bubble and a record 60% viewing global stocks as overvalued.

Despite these escalating concerns, fund managers remain net overweight on stocks, reaching levels not seen since January, suggesting a prevailing belief that potential returns outweigh the identified risks. This dichotomy highlights a sentiment-driven rally, where, as Lewis Grant of Federated Hermes notes, "FOMO" is influencing positioning and fundamentals are often an afterthought.

However, Victoria Fernandez of Crossmark Global Investments suggests a full-blown AI bubble may not be present yet, citing strong cash flow and solid profitability supporting current valuations for many companies. While AI is considered "era defining" with long-term potential, risks persist around intense capital expenditure and uncertain payoffs, making the rally vulnerable to shifts in risk appetite.

Key Decisions for Investors

• Closely monitor AI stock valuations for fundamental support, especially given the rising bubble concerns and sentiment-driven rally.
• Consider diversifying beyond core AI mega-caps into regions like Europe, particularly industrial and banking sectors, which show emerging opportunities.
• Prioritize AI investments with clear long-term strategic value, strong cash flow, and demonstrable profitability to mitigate risks associated with uncertain capital expenditure payoffs.