AI rally at risk? Wood flags IPOs, bonds may hit tech stocks soon
The relentless rally in artificial intelligence-linked stocks may be approaching a period of turbulence as rising bond yields, stretched positioning and a pipeline of mega IPOs begin to test investor appetite, according to Jefferies strategist Christopher Wood.
In his latest GREED & Fear note, Wood said there is still no evidence that AI-related capital expenditure is slowing. However, the combination of elevated valuations, concentrated positioning and looming liquidity demands has increased the risk of a near-term correction in the sector.
"All instincts are that the risks have increased significantly for a near-term major reset in the AI trade in terms of a correction, if not yet the end of the story," Wood wrote.
The caution comes as investors continue pouring money into AI beneficiaries such as Nvidia, Taiwan Semiconductor Manufacturing Co (TSMC), Samsung Electronics and SK Hynix, which have emerged as some of the biggest winners of the technology boom.
AI trade becoming increasingly crowded
Wood highlighted how concentrated investor positioning has become around the AI theme.
A survey of 16 Asia-focused investment funds found that 15 had the same three largest holdings, TSMC, Samsung Electronics and SK Hynix. Only one fund deviated, replacing one of those names with Alibaba.
The concentration reflects the growing dominance of technology stocks in Asian markets. The technology sector now accounts for nearly 48% of the MSCI Asia ex-Japan universe.
"One-way positioning" has become a growing concern, Wood noted, particularly as retail investors increasingly use leveraged ETFs to amplify exposure to AI-related stocks.
Mega IPOs could drain liquidity
Another emerging risk is the wave of high-profile listings expected to hit markets, led by Elon Musk's SpaceX.
Wood argued that these IPOs could absorb significant amounts of investor capital and potentially divert money away from existing market leaders. "The pending mega IPOs will suck liquidity out of the recent winners," he wrote.
The concern is especially relevant because many investors have accumulated large gains in AI-related stocks and may be forced to rebalance portfolios to participate in marquee offerings.
Rising bond yields pose challenge
Wood's caution on technology stocks is also tied to the changing interest rate environment. Recent US labour market data has strengthened expectations that the Federal Reserve may keep policy tighter for longer. Rising Treasury yields have historically created valuation pressure for long-duration growth stocks, particularly technology companies whose earnings are expected far into the future.
The strategist also pointed to mounting stress in the US bond market.
Foreign investors reduced their Treasury holdings by $138.4 billion in March, the biggest monthly decline since September 2022. At the same time, Japanese investors have increasingly sold overseas bonds as domestic yields become more attractive.
Wood believes these developments raise the possibility of higher bond yields globally, creating another headwind for richly valued growth stocks.
AI spending remains strong but returns are unclear
Despite concerns over valuations, corporate spending on AI continues to accelerate.
US commercial and industrial loan growth recently rose to its fastest pace since April 2023, a trend Wood partly attributes to the ongoing AI investment cycle.
However, questions remain over whether companies are generating sufficient returns from those investments.
Wood cited a recent Bain & Company survey of 951 companies globally that found nearly 40% of businesses measuring AI-related cost savings achieved less than 10% savings, despite targeting higher levels.
Yet 90% of those companies still plan to increase AI budgets.
The findings suggest enthusiasm for AI remains strong even though the economic benefits are still evolving.
DeepSeek highlights growing competition
Another development attracting Wood's attention is the rise of China's DeepSeek.
The Chinese AI company recently regained the top position on a major enterprise spending index after cutting prices by 75% for its latest flagship model.
According to Wood, the move underscores growing competition in the AI industry and highlights how pricing pressure could affect profitability across the sector.
His broader concern remains that the monetisation of large language models, particularly in consumer markets, has not yet been fully proven.
Not bearish on AI, but more cautious
Wood stopped short of declaring the end of the AI boom. In fact, his own Asia ex-Japan portfolio has benefited significantly from holdings in AI-related companies. The portfolio has gained 19.4% this quarter, with technology names accounting for most of the returns.
However, he believes investors should become more selective after the powerful rally.
The strategist noted that Nvidia chief executive Jensen Huang continues to fuel optimism around the sector through major partnership announcements and product launches. But he suggested that market expectations have become increasingly elevated.
For now, Wood's message is not to abandon the AI theme but to recognise that risks are rising.
With bond yields climbing, valuations stretched, passive flows concentrated in a handful of names and mega IPOs such as SpaceX set to compete for capital, the AI trade may be entering a more volatile phase after one of the strongest runs in market history.
In his latest GREED & Fear note, Wood said there is still no evidence that AI-related capital expenditure is slowing. However, the combination of elevated valuations, concentrated positioning and looming liquidity demands has increased the risk of a near-term correction in the sector.
"All instincts are that the risks have increased significantly for a near-term major reset in the AI trade in terms of a correction, if not yet the end of the story," Wood wrote.
The caution comes as investors continue pouring money into AI beneficiaries such as Nvidia, Taiwan Semiconductor Manufacturing Co (TSMC), Samsung Electronics and SK Hynix, which have emerged as some of the biggest winners of the technology boom.
AI trade becoming increasingly crowded
Wood highlighted how concentrated investor positioning has become around the AI theme.
A survey of 16 Asia-focused investment funds found that 15 had the same three largest holdings, TSMC, Samsung Electronics and SK Hynix. Only one fund deviated, replacing one of those names with Alibaba.
The concentration reflects the growing dominance of technology stocks in Asian markets. The technology sector now accounts for nearly 48% of the MSCI Asia ex-Japan universe.
"One-way positioning" has become a growing concern, Wood noted, particularly as retail investors increasingly use leveraged ETFs to amplify exposure to AI-related stocks.
Mega IPOs could drain liquidity
Another emerging risk is the wave of high-profile listings expected to hit markets, led by Elon Musk's SpaceX.
Wood argued that these IPOs could absorb significant amounts of investor capital and potentially divert money away from existing market leaders. "The pending mega IPOs will suck liquidity out of the recent winners," he wrote.
The concern is especially relevant because many investors have accumulated large gains in AI-related stocks and may be forced to rebalance portfolios to participate in marquee offerings.
Rising bond yields pose challenge
Wood's caution on technology stocks is also tied to the changing interest rate environment. Recent US labour market data has strengthened expectations that the Federal Reserve may keep policy tighter for longer. Rising Treasury yields have historically created valuation pressure for long-duration growth stocks, particularly technology companies whose earnings are expected far into the future.
The strategist also pointed to mounting stress in the US bond market.
Foreign investors reduced their Treasury holdings by $138.4 billion in March, the biggest monthly decline since September 2022. At the same time, Japanese investors have increasingly sold overseas bonds as domestic yields become more attractive.
Wood believes these developments raise the possibility of higher bond yields globally, creating another headwind for richly valued growth stocks.
AI spending remains strong but returns are unclear
Despite concerns over valuations, corporate spending on AI continues to accelerate.
US commercial and industrial loan growth recently rose to its fastest pace since April 2023, a trend Wood partly attributes to the ongoing AI investment cycle.
However, questions remain over whether companies are generating sufficient returns from those investments.
Wood cited a recent Bain & Company survey of 951 companies globally that found nearly 40% of businesses measuring AI-related cost savings achieved less than 10% savings, despite targeting higher levels.
Yet 90% of those companies still plan to increase AI budgets.
The findings suggest enthusiasm for AI remains strong even though the economic benefits are still evolving.
DeepSeek highlights growing competition
Another development attracting Wood's attention is the rise of China's DeepSeek.
The Chinese AI company recently regained the top position on a major enterprise spending index after cutting prices by 75% for its latest flagship model.
According to Wood, the move underscores growing competition in the AI industry and highlights how pricing pressure could affect profitability across the sector.
His broader concern remains that the monetisation of large language models, particularly in consumer markets, has not yet been fully proven.
Not bearish on AI, but more cautious
Wood stopped short of declaring the end of the AI boom. In fact, his own Asia ex-Japan portfolio has benefited significantly from holdings in AI-related companies. The portfolio has gained 19.4% this quarter, with technology names accounting for most of the returns.
However, he believes investors should become more selective after the powerful rally.
The strategist noted that Nvidia chief executive Jensen Huang continues to fuel optimism around the sector through major partnership announcements and product launches. But he suggested that market expectations have become increasingly elevated.
For now, Wood's message is not to abandon the AI theme but to recognise that risks are rising.
With bond yields climbing, valuations stretched, passive flows concentrated in a handful of names and mega IPOs such as SpaceX set to compete for capital, the AI trade may be entering a more volatile phase after one of the strongest runs in market history.
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