Investors miss out on stock picks beyond AI
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Wall Street's AI obsession is blinding investors to investment opportunities that exist outside of the technology, says a new report from Bank of America.
Why it matters: The AI trade has dominated the market and its gains. If that boom plateaus, certain non-AI stocks could lead the next leg of the rally.
Driving the news: Bank of America recommends picking stocks versus owning the entire S&P 500, which is too heavily weighted toward AI.
- Savita Subramanian, head of U.S. equity strategy, points to bubble risks, valuation and concentration concerns, growing credit events, as well as macro concerns in her market outlook. She expects an 8% return from stocks over the next year, driven by a broadening beyond just AI.
Zoom in: Analysts screened the market for buy-rated stocks outside the AI theme with upward earnings revisions and lower valuations relative to the S&P 500. Paired with their own analysis, it resulted in 16 stock picks across several sectors.
🏷️ Value and consumer plays
- Dollar General is winning back shoppers amid a stronger focus on low-price packs, just as the Arm & Hammer brand Church & Dwight is also benefitting from consumers trading down to save money.
- McCormick could benefit from tariff exemptions and remains one of the few packaged food firms posting both organic sales and volume growth.
💰 Dividends and defensive
- The competition for AT&T is overblown as its strong wireless and fiber growth underpins a 10% free cash flow yield, and Eversource Energy is benefiting from a friendlier regulatory backdrop.
- Insurer Progressive stands out for its steep positive earnings revisions. No large-cap U.S. stock has seen stronger upgrades over the past two years.
🏗️ Industrials and materials
- Freeport-McMoRan appears set for a rebound as its Grasberg copper mine restarts, with Bank of America forecasting copper prices to rise above $6 a pound by 2027.
- J.B. Hunt is benefiting from trucking capacity and a $1 billion buyback authorization, and packaging company Amcor is integrating its Berry Global acquisition ahead of schedule.
🏦 Financials and real assets
- Regional bank KeyCorp could benefit from a rebound in U.S. capital spending even amid recent credit concerns.
- Regency Centers, the grocery-anchored shopping center REIT, offers stable cash flows and a 4% yield amid record leasing.
🛳️ Leisure and entertainment
- The Viking Holdings premium cruise brand has operating profit growth in the mid-teens, while Disney theme parks and cruise ships could fuel upside next year.
The bottom line: While the AI gold rush continues, the Bank of America analysts remind investors that there is still opportunity in the "non-AI" corners of the market.
- If those AI risks Subramanian points to play out, and the bubble pops, investors who own these names could be well positioned for a rotation into undervalued but fundamentally strong stocks.
