Citi Advises Booking Profits in High-Flying AI Equities

The surge in artificial intelligence stocks might be unstoppable, but Citigroup Inc. strategists suggest it's time to take profits in the top performers. Led by Drew Pettit, the Citi team notes that sentiment towards AI-related equities is the strongest since 2019, with free cash flow at these firms expected to exceed analyst predictions.

Historically, such conditions hint at increased volatility. While there’s no clear bubble, the rally in certain stocks is "concerning," they added.

AI hype has driven stocks to new highs this year. Nvidia Corp. briefly became the world's most valuable company, and Taiwan Semiconductor Manufacturing Co. surpassed $1 trillion in market cap.

“We recommend investors book profits in high-flying AI stocks,” especially chip-makers, Pettit and colleagues wrote on July 8. They advise diversifying into a broader range of AI stocks across the value chain.

However, some money managers believe the AI buzz will persist into the second half of the year. Interviews with over a dozen investors and strategists revealed a split between those betting on mega-caps like Nvidia and those favoring secondary beneficiaries such as utilities and infrastructure providers.

Despite the recommendation to take profits, Citi strategists acknowledged that avoiding AI stocks would be challenging for many investors.

“Stock prices imply high expectations, but long-term estimates suggest they are mostly achievable,” they said, indicating that while sentiment is highly optimistic, it has not yet reached a full-blown bubble.

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