• More analysts are recommending “defensive” stocks on AI plays as macro conditions change.
• Utilities, a classic defense sector, are going head-to-head with technology.
• With artificial intelligence growth in question, investors may benefit from non-tech growth companies, an analyst said.

Defensive recommendations have taken center stage on Wall Street as AI trading shows signs of overextending and as economic conditions change.

Utility stocks — a common buy when times look tough — have gone toe-to-toe with the tech sector’s booming performance this year. Year to date, the services and technology sectors have gained 22.08% and 25.69%, respectively.

Defensive sectors of the stock market, which can also include real estate and consumer staples, tend to be better plays when macro conditions appear to be softening. As employment data has weakened in recent months, investors are getting nervous about an upcoming decline.

Meanwhile, although the sector has made a comeback this week, major AI names have struggled to find their footing, with Nvidia facing tough questions about returns on companies’ AI investments. The broader S&P Global Semiconductor Index is down 5.63% for the month.

As the AI ​​trade takes a breather and as data suggests the economy may be cooling, more analysts are recommending investors take shelter in the defensive corners of the stock market.

Bank of America said investors should avoid buying the tech bearish, noting that market volatility will increase over the long term. In addition to dividend-paying services, he also suggested investors seek exposure to real estate.

Similar to BofA’s call, Morgan Stanley’s Mike Wilson last week called the AI ​​theme “cooked” and said investors should move into defensive stocks.

According to Brad Conger, CIO of investment firm Hirtle Callaghan, some of the S&P 500’s most “boring” companies are at the center of the defensive theme.

“Our position is that there are a lot of high-growth businesses that are undervalued because of the excitement around technology and AI,” Conger told Business Insider, citing things like waste management companies.

The performance of such defensive names would increase dramatically if the U.S. economy took a turn, he added.

“That’s what we’ve seen in the last eight weeks — as the prospect or possibility of a recession has gone from, say, 10% to 30%, then those things took a tailwind.”

Like Morgan Stanley’s Wilson, Conger believes AI is overstretched, and he warned that hardware firms like Nvidia are facing a cliff if the technology doesn’t start showing real returns on investment.

Firms from BlackRock to Vanguard agree that timelines should be adjusted. JPMorgan noted in a recent report that adoption trends need to move higher if the technology hopes to avoid a “metaverse outcome,” referring to virtual reality worlds that saw huge investment a few years ago but have since didn’t end up producing much return. .

To be sure, most on Wall Street are still unconvinced by AI’s potential. Wealth Alliance’s Eric Diton told BI that Nvidia’s recent decline was a case of profit-taking rather than a sign of sustained weakness

“We can’t fathom what this will look like 10 years from now, but AI will become a major part of everyone’s daily life,” said the firm’s president. “I have no doubt in my mind.”

But, echoing what others have said, Dayton also called utility stocks a meaningful investment to make now. While bullish on AI, he cautioned that the market has become extremely concentrated in the top tech names and investors need to diversify.

“Should you have exposure to AI and technology? Absolutely. But do you want to do it the way the S&P 500 is?” he said. “No, you don’t. You don’t want to have 20% of your net worth and three stocks.”

With the Federal Reserve expected to cut interest rates at its meeting this week, Dayton also suggested investors get into high-dividend stocks and long-dated bonds. He also shared a preference for small caps, which may see stronger performance when borrowing costs fall.