AI stocks have been hit recently. Why this investor suggests buying the dip on Alphabet and other hyperscalers

Portfolio manager Tom Hancock of GMO's U.S. Quality ETF (QLTY) advises institutional investors to leverage current volatility in AI stocks as a buying opportunity, particularly focusing on 'hyperscalers' like Alphabet due to their integrated AI ecosystems, proprietary technology, and strong balance sheets. Despite concerns over an AI bubble and recent tech sector pullbacks, Hancock maintains a bullish, long-term perspective, viewing short-term selling events as chances to accumulate. He also recommends managed care and pharmaceutical stocks, suggesting recent selling in the healthcare sector is an overreaction.

Analysis

Portfolio manager Tom Hancock of GMO's U.S. Quality ETF (QLTY) advises institutional investors to capitalize on current volatility in AI stocks, viewing recent tech sector pullbacks, including the Nasdaq's 3% drop last week, as strategic buying opportunities. He maintains a bullish long-term perspective on AI, asserting that short-term market fluctuations should not deter investors given the technology's eventual widespread adoption in five to six years.

Hancock specifically recommends "hyperscalers," with Alphabet (GOOGL) identified as a top AI pick due to its unique position providing both end applications and infrastructure via proprietary Tensor Processing Unit (TPU) chips. The upcoming Ironwood, its seventh-generation TPU, is expected to enhance its cost-of-goods advantage and proprietary data leverage, differentiating it from competitors reliant on external chip providers.

Beyond AI, Hancock also suggests managed care and pharmaceutical stocks, arguing that recent selling in the healthcare sector, influenced by ACA subsidy concerns, is an overreaction as these subsidies do not significantly impact company profits. He cautions about the risk of funding drying up for capital expenditure if risk aversion rises, advocating for companies with robust balance sheets.

GMO's U.S. Quality ETF (QLTY) has gained 17.4% year-to-date, slightly outperforming the S&P 500, with key holdings including Microsoft, Lam Research, Alphabet, Broadcom, and Apple. This performance reflects a strategy focused on high-quality, established technology and healthcare names capable of navigating market cycles.

Key Decisions for Investors

• Utilize current tech sector volatility, particularly in AI, as a strategic buying opportunity for long-term positions, prioritizing "hyperscalers" like Alphabet (GOOGL) that demonstrate integrated ecosystems and proprietary technology.
• Evaluate managed care and pharmaceutical stocks for potential value, as recent selling in the healthcare sector may be an overreaction to ACA subsidy concerns, which reportedly have limited profit impact.
• Focus on companies with robust balance sheets and strong fundamentals to mitigate potential risks associated with increased market risk aversion and reduced capital expenditure funding.