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How to trade AI? Citi says take profits as sentiment is most elevated since 2019


Citi analysts warned investors about potentially overheated sentiment in Artificial Intelligence (AI) stocks.

Their note highlights how optimism surrounding AI stocks has reached its highest level since 2019, based on factors like market expectations and historical price movements.

“Sentiment around stocks with high exposure to AI is the most elevated it has been since 2019,” states Citi.

This concern stems from a combination of factors. Firstly, Citi’s estimates for future growth in these stocks are significantly lower than what market prices currently imply. Secondly, the recent price surge of AI stocks significantly outpaces historical growth trends. Finally, options market data suggests a potential imbalance towards bullish bets on AI.

Citi recommends capitalizing on this situation by taking profits on high-flying AI stocks, particularly those in the “enabler” category, such as semiconductor companies. “We continue to suggest investors take profits in AI highfliers,” advises Citi.

Investors can then reinvest these profits “more broadly across the theme’s value chain,” creating a more balanced portfolio within the AI sector.

For those who are even more cautious about the AI market, Citi offers an alternative strategy: the AI Hedge Basket.

This basket is designed to benefit from a potential decline in AI stocks. “We introduce the AI Hedge basket as an alternative to outright shorting,” explains Citi. The basket prioritizes companies with negative correlations to high AI exposure stocks, offering a hedge against potential losses.

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