Concerns about the artificial intelligence bubble are growing, but many investors want to put it aside in pursuit of increased profits. The latest edition of Bank of America’s Global Fund Manager Survey identifies a potential AI bubble as the biggest tail risk to the market. The survey, conducted between October 3 and 9 among 166 fund managers managing assets worth a total of $400 billion, found that a third cited the AI stock bubble as their biggest threat, up from about one in 10 a month earlier. This was the first time in the monthly survey’s history that the AI bubble was cited as the biggest risk to the market. Stocks have soared this year as capital flows into AI and AI-related companies. But increasingly, major institutions and influential figures are warning about soaring valuations. This month, more than 50% of fund managers told the BoA they believed AI stocks were already in a bubble, and 60% of those surveyed said global stocks were overvalued, a record high. A month ago, 41% of respondents said stocks were in a bubble. However, these concerns were not strong enough to overturn the general optimism. Bank of America strategists said in a report on their findings that fund managers were the most net overweight in stocks since January, before President Donald Trump’s so-called “Emancipation Day” announcement heightened volatility, and that “positioning suggests investors see returns that outweigh risk.” Emerging markets became the preferred region for global equity investors in October, according to BoA research, although fund managers also remained overweight to European stocks. Banking is the most overvalued sector in Europe, with only 4% of respondents expecting a downturn in the sector going forward, despite strong gains in the first half. “The tail risks of an AI bubble are not enough to dampen optimism,” central bank strategists said in a report on the European survey results. “Concerns around the AI bubble are rising and are the biggest source of tail risk in the market, but not enough to dampen the more positive outlook for the broader stock market.” Lewis Grant, Federated Hermès’ senior portfolio manager for global equities, “defining an era,” told CNBC that this year’s stock rally has been “primarily sentiment-driven, with fundamentals taking a backseat.” “FOMO (fear of missing out) can shake the resolve of even the most disciplined person, and there are many reasons to say this time will be different,” Grant said. “AI as a technology is era-defining, and the market rally associated with it is being led by established, well-capitalized mega-cap companies. This story is compelling, but it is only part of the investment process. Mentalities and valuations are just negligible over time.” Grant said his team is bullish on long-term investments in AI, but added that there are risks to investing in this space and that focusing on the technology could mean missing out on other opportunities. “Such intense capital expenditures have uncertain returns in terms of amount and duration, leaving AI stock appreciation vulnerable to sudden changes in risk appetite,” he said. “We think there is an opportunity in Europe as the industrial machinery starts to turn, but it certainly could take some time to get off the ground and there are potential challenges,” he said. Meanwhile, Victoria Fernandez, portfolio manager and chief market strategist at Crossmark Global Investments, told CNBC that a bubble could form around AI, even if it hasn’t formed yet. “I don’t think we’re in an AI bubble yet, but depending on valuation trends, we could reach one fairly easily,” Fernandez said. “We’ve seen so much herd behavior that it’s hard to imagine a single investor, institutional or retail, who isn’t talking about AI stocks as part of the market conversation. We don’t see any signs of a bubble yet, but at an earnings level so far, companies have been able to support valuations with strong cash flows and solid profitability.”
