Bank of America Warns Fed could Burst AI Bubble, but Markets Don’t Buy It

Bank of America said that artificial intelligence, as this year's new investment craze, is in a baby bubble. But if the Fed makes a policy mistake, the AI bubble could burst like the dot-com bubble in the early 2000s.

AI is in a "baby bubble”

With the launch of ChatGPT at the end of last year, the enthusiasm of the global market for the prospect of artificial intelligence was ignited in one fell swoop, and artificial intelligence-related companies were also favored by investors.

AI is currently in a "baby bubble," Michael Hartnett, chief investment strategist at Bank of America Global Research, wrote in a note last Friday.

Fed's Policy Mistakes Could Burst the AI Bubble

This month, the Fed has raised its benchmark interest rate for the 10th time in a row to ease inflationary pressures. However, the Fed is widely expected to pause rate hikes at its next meeting in mid-June.

Bank of America warned that if the Federal Reserve made a mistake in its current policy decisions, it is very likely that the artificial intelligence bubble will repeat the history of the dot-com bust.

Hartnett expects U.S. bond yields to rise above 4% if the Fed makes the mistake of pausing rate hikes in 2023. As of last Friday, the 10-year U.S. Treasury yield was at 3.67% on Friday May 19.

However, the market seems not to buy the artificial intelligence bubble view of Bank of America.

Ben Snider, a senior strategist at Goldman Sachs, recently said that the potential of artificial intelligence technology to improve productivity may increase the profits of S & P 500 index stocks by 30% or more in the next 10 years.

Fundstrat cautioned that investors are right to be optimistic about artificial intelligence, but big tech stocks now look overbought.

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