A.I. trade is leaving investors vulnerable to painful losses: Evercore

Finance

The artificial intelligence trade may be leaving investors vulnerable to significant losses.

Evercore ISI’s Julian Emanuel warns Big Tech concentration in the S&P 500 is at extreme levels.

“The AI revolution is likely quite real, quite significant. But … these things unfold in waves. And, you get a little too much enthusiasm and the stocks sell off,” the firm’s senior managing director told CNBC’s “Fast Money” on Monday.

In a research note out this week, Emanuel listed Microsoft, Apple, Amazon, Nvidia and Google parent Alphabet as concerns due to clustering in the names.

“Two-thirds [of the S&P 500 are] driven by those top five names,” he told host Melissa Lee. “The public continues to be disproportionately exposed.”

Emanuel reflected on “odd conversations” he had over the past several days with people viewing Big Tech stocks as hiding places.

“[They] actually look at T-bills and wonder whether they’re safe. [They] look at bank deposits over $250,000 and wonder whether they’re safe and are putting money into the top five large-cap tech names,” said Emanuel. “It’s extraordinary.”

It’s particularly concerning because the bullish activity comes as small caps are getting slammed, according to Emanuel. The Russell 2000, which has exposure to regional bank pressures, is trading closer to the October low.

For protection against losses, Emanuel is overweight cash. He finds yields at 5% attractive and plans to put the money to work during the next market downturn. He believes it will be sparked by debt ceiling chaos and a troubled economy over the next few months.

“You want to stay in the more defensive sectors. Interestingly enough, with all of this AI talk, health care and consumer staples have outperformed since April 1,” Emanuel said. “They’re going to continue outperforming.”

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