As concerns about a potential tech bubble in the U.S. intensify, investment strategists are exploring various diversification strategies on both sides of the Atlantic to protect portfolios against a possible market decline. Market experts, speaking with CNBC, indicate that European equities, government bonds, and value stocks could provide advantageous options amid valuation worries within the artificial intelligence (AI) sector.
Arnaud Girod, head of economics and cross-asset strategy at Kepler Cheuvreux, expressed on Monday that he anticipates continued pressure on specific AI-linked technology stocks in the U.S., particularly in the semiconductor sector. In an interview on CNBC’s “Europe Early Edition,” Girod pointed out that anticipated capital expenditure (capex) spending for data centers—crucial for the AI boom—has outpaced earlier forecasts. However, he also highlighted concerns regarding physical constraints such as power availability, grid connections, and risks of overheating, suggesting that this rapid growth could exacerbate inflation. Girod noted, “This boom is translating into higher inflation,” which could lead to delays in data center projects.
U.S. markets experienced volatility last week, with tech stocks facing heightened scrutiny over valuations amid a market rotation that challenged the prevailing AI narrative. Against this backdrop, Girod posited that European equities present a diversification opportunity for global investors. He remarked on the limited exposure of European stocks to AI compared to markets in Japan and Korea, emphasizing that most AI exposure lies within the industrial sector.
While utility stocks have recently drawn attention due to expectations around increased power demand, Girod stressed that the potential remains minimal. He further indicated that fixed-income investments are becoming increasingly attractive relative to equities. “If you want to be invested in stocks, you are going to be invested in AI,” he noted, highlighting that the ten largest constituents of the MSCI index are currently U.S. tech firms. The market is nearing the dotcom peak in terms of valuation, a situation Girod found surprising. In comparison, bonds are becoming more competitive, with treasury yields now around 4%. “This is not so bad in relative terms,” he said.
Amidst ongoing inflationary concerns—particularly regarding how tariffs may impede its downward trend—Girod observed that President Trump’s realization of the tariffs’ impacts could signal a pivotal shift.
Looking ahead, John Blank, chief equity strategist at Zacks Investment Research, views value stocks as “the big play” for the upcoming year. In a discussion on CNBC’s “Squawk Box Europe,” he remarked, “It’s going to be value stocks with some growth element.” He noted that biotech stocks, which have significantly declined, still present growth opportunities alongside sectors like industrials and banking, which appear poised for a rotation.
Investor behavior is also shifting, as many are beginning to reassess the “Magnificent Seven” tech stocks—namely, a group of perceived top performers—on a more individualized basis. Blank pointed to recent SEC 13-F filings as evidence of this shift. For instance, Warren Buffett’s Berkshire Hathaway recently made a substantial $4.3 billion investment in Alphabet while reducing its stake in Apple by 15%. Meanwhile, David Tepper’s Appaloosa Management lessened its investments in Alphabet, Meta, and Amazon but increased its position in Nvidia by 85%.
Blank observed, “We got a little too carried away lumping the seven big stocks together,” noting the disparity in price-to-earnings ratios among them. The varying valuations—from Tesla’s high P/E ratio of 200 to Meta’s 20—indicate the need for a more nuanced assessment of these companies. As analysts and investors dissect these stocks individually, Blank anticipates a more targeted investment approach will emerge, addressing their distinct circumstances and potential.
