AI Skepticism Could Be a ‘Contrarian’ Positive for Tech Stocks

Last week’s losses in tech were more about big-picture issues than concerns about the AI trade, BofA argues. (Dreamstime)

A lack of belief in the artificial investment trade could be its best form of support over the longer term.

Bank of America argues that skepticism about the new technology will prevent the buildup of even more hype regarding the most important source of growth in the stock market. That could end the sort of overheating that could end in tears.

Bank of America analysts, led by Vivek Arya, say that last week’s slump in the Nasdaq Composite , largely powered by a near 5% pullback in the Magnificent Seven stocks, may appear to suggest a cooling of enthusiasm about AI. But they argue that the slide was more closely tied to “correctable macro factors,” such as the government shutdown, soft jobs data, and uncertainty about tariffs than to “any negative data point about the AI spending cycle.”

Comments from OpenAI finance chief Sarah Friar on the need for a government backstop to AI funding, which she and CEO Sam Altman quickly walked back, added to the weakness. New bets against the sector and commentary from the famed The Big Short investor Michael Burry also piled more pressure on the AI narrative. Meta Platforms stock’s slide into bear-market territory didn’t help, either.

“It was a nervous week for tech investors as a risk-off rally injected some near-term concern into this bull market,” said Wedbush analyst Dan Ives. “This added to fears around the ‘AI bubble’ talk and the ‘too big to fail’ OpenAI chatter.”

Arya and his colleagues say that the broader line of attack against the current AI trade, which appears to be centered around the longer-term ambitions of ChatGPT creator OpenAI, is unconvincing.

“The common argument that ‘AI stocks must be overvalued because OpenAI cannot justify $1.4 trillion of long-term commitments’ is a lazy/cherry-picked argument in our view,” Arya said.

“The pervasive skepticism re AI capex is understandable but likely a contrarian positive, helping minimize overcrowding,” he added. “The majority of AI spending is being done by profitable, public hyperscalers for whom upgrading infrastructure is mission-critical and defensive.”

A lot of the spending, Arya argues, is likely to find its way toward Nvidia , one of the bank’s top stock picks in the AI sector. Citing Nvidia’s unveiling of $500 billion in Blackwell orders through its 2026 fiscal year at an event in Washington last month, and its potential to grow sales and earnings by between 50% and 70% a year, Arya says the market’s most important stock is likely undervalued.

“If 2030 AI capex gets to be even 50% of Nvidia’s $3 trillion to $4 trillion forecast, the company would likely generate over $40 a share in scenario earnings,” he said. “That supports our argument that despite media headlines, Nvidia stock is priced for very measured AI rollouts.”

Ives at Wedbush is also an Nvidia bull. He said in a note published Monday that CEO Jensen Huang has “the best perch and vantage point to discuss overall enterprise AI demand.”

Analysts expect Nvidia, which will publish its fiscal third quarter earnings after the close of trading on Nov. 19, to post earnings of $1.13 a share on revenue of $54.1 billion. That would represent a 55% increase in revenue from a year ago.

“We believe Nvidia’s earnings next week will be a positive catalyst for tech stocks into year-end as investors continue to underestimate the scale and scope of this transformational spending trend over the next few years,” he added.

Write to Martin Baccardax at martin.baccardax@barrons.com