The Ultimate Research on US Stocks: Bidding Farewell to AI Giants and Turning to All-Weather Investing?

“The allure of AI giants is fading, suggesting a shift towards an all-weather strategy.”

Bank of America (BofA) advises investors to shift their focus from artificial intelligence (AI) investments to an all-weather investment strategy. This recommendation comes against the backdrop of soaring investment interest in the AI sector, yet there remains skepticism about whether the returns can cover the high costs. The all-weather investment strategy emphasizes maintaining a robust portfolio under various market conditions to ensure stable long-term returns.

The stocks known as the “Seven Titans”—Alphabet, Amazon, Nvidia, Netflix, Tesla, Apple, and Microsoft—have outperformed the S&P 500 Index. These companies, with their leadership in their respective fields, have achieved significant growth in market value, which has, to some extent, driven the rise in tech stocks overall.

Profit growth expectations for AI-related ETFs are gradually decreasing and approaching the forecast levels of the S&P 500 Index. This indicates that the market is adopting a more cautious attitude towards the future returns of AI investments, which could also create opportunities for other stocks in the S&P 500 to benefit from the relative downturn of AI stocks.

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What is the All-Weather Investment Strategy?

The All-Weather Investment Strategy is an investment approach designed to cope with different economic environments and market conditions. Its core objective is to achieve stable long-term returns by constructing a diversified portfolio, reducing dependence on a single market or economic condition. Here is an in-depth introduction to the All-Weather Investment Strategy:

1. Strategy Background and Objectives

The All-Weather Investment Strategy was proposed by renowned investor Ray Dalio and his firm, Bridgewater Associates. The goal of this strategy is to maintain a stable performance of the investment portfolio across different economic cycles and market conditions, including various scenarios such as economic growth, recession, inflation, and deflation.

2. Portfolio Construction

An all-weather investment portfolio typically includes the following key asset classes to achieve diversification and risk dispersion:

• Equities: Representing the potential for economic growth and corporate profit increases. Includes large-cap blue-chip stocks and growth stocks.
• Bonds: Providing stable fixed income to counter the volatility of the stock market. Includes long-term and short-term government bonds, corporate bonds, etc.
• Commodities: Such as gold, crude oil, etc., which can provide protection during inflationary periods.
• Cash and Cash Equivalents: Providing liquidity and stability during market uncertainty.

3. Risk Management

The All-Weather Investment Strategy focuses on managing risk through asset allocation. Different asset classes perform differently in various economic environments, and by appropriately allocating these assets, the overall volatility and risk of the investment portfolio can be reduced. For example:

• During economic growth: Equities perform well, and rising bond yields may negatively impact bond prices.
• During economic recession: Bonds usually perform well, while equities may decline.
• During inflation: Commodities (like gold) may benefit, and bond yields may come under pressure.
• During deflation: Bonds may perform well, while commodities may not fare as well.

4. Asset Allocation Principles

The All-Weather Investment Strategy typically follows these asset allocation principles:

• Diversification: Investing in a variety of asset classes to reduce the impact of fluctuations in a single asset class on the overall portfolio.
• Dynamic Adjustment: Adjusting asset allocation dynamically according to changes in market environments and economic conditions to optimize risk and return.
• Long-term Perspective: The strategy usually focuses on long-term investments, not short-term profit fluctuations, aiming for long-term stable growth.

5. Advantages and Limitations

Advantages:

• Risk Diversification: Diversified investments reduce the risk of a single asset class or market.
• Stability: Stable performance across different economic cycles, reducing portfolio volatility.
• Flexibility: Adaptable to various economic environments and market conditions.

Limitations:

• Return Limitations: To reduce risk, the All-Weather Investment Strategy may not achieve maximum returns when the market is strongly rising.
• Management Complexity: Requires regular assessment and adjustment of asset allocation to ensure consistency with economic environments and market conditions.

Overall, the All-Weather Investment Strategy is suitable for investors seeking long-term stable returns and risk diversification. It emphasizes diversification and flexible adjustments to cope with various market environments and economic cycles.

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Why does BofA suggest focusing on the All-Weather Strategy?

BofA suggests turning to the All-Weather Investment Strategy in the current market environment, mainly based on the following considerations:

1. AI Investment Return Risks

BofA points out that while investments in the field of artificial intelligence (AI) are very popular, there is still uncertainty about whether the returns can cover the high investment costs. As profit growth expectations for AI-related stocks decrease, the market’s optimism for these investments wanes, suggesting the adoption of an all-weather investment strategy to cope with potential market volatility and risks.

2. Market Environment Uncertainty

The current economic and market environment has a certain level of uncertainty, including fluctuations in economic growth, changes in inflationary pressures, and political and economic risks in the global market. The All-Weather Investment Strategy, through diversified asset allocation, can maintain robust performance in various economic environments, helping investors cope with these uncertainties.

3. Performance of the “Seven Titans” Stocks

BofA notes that the “Seven Titans” in tech stocks—Alphabet, Amazon, Nvidia, Netflix, Tesla, Apple, and Microsoft—although outperforming the S&P 500 Index, concentrated investment in these stocks may bring higher risks. As the market value of these stocks has grown significantly in the past few years, over-reliance by the market could lead to potential bubble risks. Therefore, BofA suggests shifting focus to a more balanced and diversified all-weather investment strategy to reduce the risks of a single asset class.

4. Declining Profit Growth Expectations

AI-related ETFs’ profit growth expectations are gradually approaching the S&P 500’s level, indicating that the market’s high-growth expectations for AI are returning to reality. This could make investment strategies centered on AI no longer have a clear advantage. Shifting to an all-weather investment strategy can help investors achieve long-term stable returns in an environment of declining profit growth expectations.

5. Diversification Advantages of Asset Allocation

The All-Weather Investment Strategy emphasizes the diversification of asset allocation, including equities, bonds, commodities, and cash. This diversified asset allocation can effectively disperse risks and enhance the stability of the investment portfolio in different market environments. BofA believes that the current market uncertainty makes this strategy more advantageous than investment strategies focused on specific industries or asset classes.

Through the above factors, BofA believes that the All-Weather Investment Strategy can help investors achieve better risk management and return stability in the current complex market environment.

BofA recommends some stocks to watch, including:

• O’Reilly Automotive (auto parts retailer)
• NVR (residential construction company)
• Progressive (insurance company)
• KKR (investment company)
• Arch Capital Group (insurance company)
• Costco Wholesale (retail giant)
• Vertex Pharmaceuticals (pharmaceutical company)
• HCA Healthcare (healthcare provider)
• Analog Devices (semiconductor company)
• Amphenol (electronic connector manufacturer)
• Vulcan Materials (building materials supplier)

BofA has a bearish outlook on the technology, consumer goods (including both consumer and staple goods), and healthcare sectors. In contrast, they believe that companies in the materials and industrial sectors may benefit from the Federal Reserve’s interest rate cuts. This is because lower interest rates usually stimulate infrastructure construction and other industrial activities, thereby driving profit growth for related companies.

In summary, although tech stocks and AI investments continue to attract attention, BofA believes that shifting to a more diversified investment strategy that can cope with various market conditions is more robust in the current market environment. These investment strategies include focusing on materials, industrials, and other potential stocks.