(Bloomberg) -- US stocks are at a critical juncture where a disorderly selloff in artificial intelligence-related stocks risks sinking the broader market, according to Pictet Wealth Management.
Although US equities remain a top pick at the firm, valuations look vulnerable after a 70% rally in the S&P 500 since late 2022 that was driven by a small group of tech stocks, according to Geraldine Sundstrom, head of investment offering at Pictet Wealth.
“This type of concentration typically doesn’t last forever and we feel stocks will mean revert to an environment where the performance is broader,” Sundstrom said at a media roundtable event in London.
The comments follow a wobble in the S&P 500 on Monday after excitement about a new Chinese chatbot called DeepSeek fueled concern about lofty AI valuations in the US. The impact was limited to only a handful of heavyweight stocks and the index has since partially recovered.
DeepSeek might prove to be the catalyst for a renormalization, Sundstrom said. The question now is whether that change happens gradually or takes the rest of the market down with it, “because then there will be an impact on the Federal Reserve, on the dollar, and there could be deep repercussions,” Sundstrom said.
UK Optimism
Separately, Pictet Wealth also believes markets are underpricing the extent of interest rate cuts by the Bank of England this year, and expects that the boost to UK growth from more aggressive monetary easing could lift the pound toward its strongest level against the euro in nearly a decade.
Senior Investment Specialist Rupert Howard expects the BOE to deliver 125 basis points of cuts by the end of the year, compared with around 70 basis points priced in by traders, as a weakening labor market cools inflation pressures in the coming months.
The pace of cuts could accelerate in the second half of the year, lifting the pound as high as 1.25 euros, or around 0.80 pence per euro, a level last seen in mid-2016, Howard said.