AI Frenzy Stalls as Tech Stocks See First Outflows in Two Months

(Bloomberg) — The AI frenzy that has driven massive inflows into tech stocks is marking a pause, Bank of America Corp. says.

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Tech funds sustained $1.2 billion of outflows in the week through June 7, their first in eight weeks, according to the bank, citing EPFR Global data. The move occurred after the group had record inflows last week.

“Central banks are pivoting back to hikes,” strategists led by Michael Hartnett wrote in a note on Thursday, pointing to recent surprise increases in Canada and Australia. The “Fed ain’t done with hikes,” they added, given low unemployment and high inflation.

After gains of more than 30% for the S&P Information Technology Index this year, the rally spurred by the AI hype has been showing signs of fatigue this month, with the sector underperforming all other industry groups as traders weighed the potential for another hike from the Federal Reserve next week. Still, weaker-than-expected job data on Thursday helped tech stocks grind higher to push the S&P 500 into bull market territory.

For Hartnett and his team, the first quarter recession fears melted into a second quarter “Goldilocks greed,” but rising rates and a liquidity drain are incoming negative risks for longs built in AI and US tech in the third quarter, they said.

“We remain bearish,” the strategists wrote, expecting Fed funds at 6%, while inflation below 3% would require an unemployment rate above 4%. They see the view of rising earnings forecasts combined with falling rates as “unsustainable.”

BofA’s Hartnett — who correctly predicted the stock slump in 2022 — remains negative on stocks overall amid the prospect of tightening financial conditions.

Other highlights:

Cash drew the largest inflows this week at $70.6 billion, taking the year-to-date inflows to $837 billion, closing in on the record $917 billion seen in 2020
Bond funds had strong inflows across the board at $13.4 billion, led by Treasuries and IG bonds
Stock funds had a second week of inflows at $7.7 billion, the strongest two weeks since January, driven by emerging markets and Japan, while Europe had a 13th consecutive week of outflows at $2.6 billion