Investors can’t seem to hear enough about artificial intelligence. But those focused too much on giant tech companies may be missing a big opportunity: classic value stocks in areas like energy, utilities, and financial services.
So far this year, large growth stocks, with a gain of 19% in 2024, have handily led their value counterparts, up just 6%. The trend resembles the Nifty Fifty craze from the late 1960s and early 1970s, according to a new note from
There’s one big difference: Those stocks eventually crashed, which “ended a decade of fiscal excess war & inflation,” said the bank. This time around, growth stocks have gotten a second wind, driven by excitement around AI.
Apple
’s
Tuesday surge to a record high, driven by the iPhone maker’s partnership with OpenAI, parent of ChatGPT, is the latest example.
All the same, market dynamics still favor a value rally, the firm argues. One big reason: Over the past several quarters, much of the market’s profit growth has been driven by the handful of big tech stocks known as the Magnificent Seven. Bank of America argues that during 2024 and 2025, these firms should see growth rates slow, while those of the rest of the market accelerate, closing the gap and helping to propel share prices of underpriced value stocks.
There are several dynamics at play. Outside of big tech, many companies have spent the past decade focused on so-called “low quality” earnings growth. That includes moves like share buybacks that drive earnings per share higher but don’t actually improve a company’s business.
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But in recent quarters, inflation has forced firms to get serious about cutting costs to improve their bottom lines, and in some cases, AI has given them a new way to boost productivity. “Corporate America has the impetus as well as new tools to grow [more] efficient,” according to the note. “This is unequivocally bullish.”
How exactly all this plays out depends on the industry, Bank of America says.
A recent fashion for investing in clean energy and companies with attractive environmental, social, and governance profiles has caused investors to overlook many traditional energy and utility stocks, such as those that make up the Energy and Utilities Select Sector SPDRs. After years of underinvestment, these sectors both stand to benefit from increased energy use—one of the big knock-on effects of AI.
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Even nuclear energy is getting a push, with the White House recently announcing a plan to bolster U.S. nuclear production alongside solar and wind. “Utilities control the power required for AI,” notes Bank of America.
Financial stocks, like those in the
ETF, have a different story, but also stand to benefit from current dynamics. The nation’s largest banks should continue to be buoyed by profitable capital- markets and wealth management operations, while credit costs ease, Bank of America said in another recent note.
Banks also stand to benefit from new capital investment and AI. Over the past generation, technology has already moved much of the industry from bricks-and-mortar branch networks to online.
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More recently, banks have been employing AI for customer service chatbots and back-office tasks. Soon the technology could start helping with additional tasks like detecting fraud and cyber threats, according to Bank of America research.
“If you think about Generative AI, it is a game changer for some of the professional services companies or financial services companies that can now start to become more productive,” said Savita Subramanian, Bank of America Securities’ head of U.S. Equity and Quantitative Strategy in an interview transcript the firm published with its latest note.
Write to Ian Salisbury at ian.salisbury@barrons.com
