Fresh Survey Stokes AI Bubble Fears. How to React.
Key Points
AI-related stocks have made an estimated 90% of the S&P 500’s total capital expenditures since November 2022.
For the first time in 20 years, professional fund managers are saying companies are spending too much.
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There's usually not a single moment or decision that causes an investment trend to fall out of favor. But sometimes a big group of influential investors seem to change their minds at the same time. Now might be one of those times. The latest Global Fund Manager Survey from Bank of America shows a big change in how money managers feel about companies' capital expenditures, also called capex.
This shift in sentiment happened just within the past three months, and it could explain some of the recent declines in AI stocks like Meta Platforms (NASDAQ: META), Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), and Microsoft (NASDAQ: MSFT). Stocks of all of these major hyperscalers -- the companies spending the most on AI capex -- are down year to date, underperforming the S&P 500 index.
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META data by YCharts.
Let's look at why fund managers are getting skeptical about AI capital expenditures, and what it might mean for the future of the AI boom.
Suddenly, fund managers are against this spending
For the past 20 years, the BofA Global Fund Manager Survey has asked its audience of professional investors if they believe that companies are "overinvesting" in capital expenditures. For most of the past 20 years, this survey has shown a preference for more capex spending. Most of the time, fund managers believed that companies could afford to invest more cash to try to create growth.
But just within the past three months, that script has flipped. Recently, fund managers have been saying they believe companies are overinvesting in capital expenditures.
Image source: Getty Images.
While AI wasn't mentioned specifically in the survey question, AI data center buildout and digital infrastructure for AI have become corporate America's biggest reasons for capital spending. JPMorgan analyst Michael Cembalest estimates that 90% of capex growth since November 2022 came from AI-related stocks. Investors are getting nervous that these capex investments won't pay off.
How to invest if AI's in a bubble
What should you do if you want to move money away from a possible AI bubble?
You might want to invest in assets that are in a totally different part of the market than AI stocks. Consider buying international stocks via the Vanguard Total International Stock ETF (NASDAQ: VXUS), value stocks through the Vanguard Value ETF (NYSEMKT: VTV), or bonds in the Vanguard Total Bond Market ETF (NASDAQ: BND). All three of these funds have outperformed the AI hyperscalers and the tech-heavy Nasdaq-100 index year to date.
Vanguard's 2026 economic and market outlook projects that investments like these -- high-quality U.S. fixed-income, U.S. value-oriented stocks, and non-U.S. developed-market stocks -- have the strongest risk-return profile for the next five to 10 years. They might outperform tech stocks.
Markets change quickly based on new information. The major AI companies might announce new breakthroughs that reignite investor enthusiasm for the AI trade. But if you want to try to protect against the risks of an AI bubble, value stocks, international stocks, and bonds could help diversify your portfolio.
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Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Ben Gran has positions in Vanguard Total Bond Market ETF and Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, JPMorgan Chase, Meta Platforms, Microsoft, Vanguard Total Bond Market ETF, Vanguard Total International Stock ETF, and Vanguard Value ETF. The Motley Fool has a disclosure policy.
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