Bank of America: Next AI Winners May Emerge Beyond Crowded Tech Stocks

Investors seeking the next wave of artificial intelligence beneficiaries should look beyond the crowded semiconductor and mega-cap technology space, according to a recent analysis from Bank of America. The firm highlights that while the initial AI rally has overwhelmingly rewarded direct hardware players, significant opportunities may now lie in less obvious, undervalued sectors.

A Crowded Trade

The AI investment theme has been a primary driver of market gains, shaking off geopolitical concerns and pushing indices to record levels. This rally has been heavily concentrated in a few key areas, particularly semiconductor manufacturers and the so-called "Magnificent Seven" mega-cap stocks.

According to the report, this has led to stretched valuations and recent profit-taking as investors weigh whether the trade has moved too far, too fast. The performance of chipmakers underscores this trend, with the Philadelphia Semiconductor Index posting a record 18-day winning streak earlier this year and remaining up approximately 64.8% year-to-date.

Untapped Potential in 'Unloved' Sectors

Bank of America's research points to non-tech companies, specifically AI capacity suppliers, as a source of untapped value. These firms, which fall into the energy and materials sectors, have seen some of the largest positive earnings revisions but have been "largely untouched" by the market's AI enthusiasm.

The brokerage notes that these sectors are currently out of favor with institutional investors. Over the last three months, long-only managers were a 31% underweight in energy and a 6% underweight in materials, suggesting these areas are not crowded and may offer more attractive entry points.

Ad

The Search for Value

BofA strategists advise that the search for value may require looking at "another degree of separation from the direct beneficiaries" that have already experienced significant price appreciation. The bank suggests that less crowded industries poised for potential outperformance are those realizing quieter AI-driven gains.

Key areas identified by the bank include companies benefiting from:

• Workflow automation
• Faster product development cycles
• Lower back-office intensity

These second-derivative plays offer a potential path for investors looking to capitalize on the broader economic impact of AI beyond the initial hardware build-out.