Global investors are buying more technology stocks even as warnings mount that the artificial intelligence boom could turn into a bubble. The question is why they cannot stop investing when they already see the risk.
Tech Allocations Hit Six-Year High Despite Bubble Fears
According to U.S. financial data provider Barchart, 37% of respondents to Bank of America's October global fund manager survey said they had increased their allocation to technology stocks. That is up 7 percentage points from 30% the previous month and the highest level since August 2020.
What stands out is that investors are well aware of the risk of overheating in the AI market. Some 45% of respondents said they expect an AI bubble to form in 2027, while 42% said no bubble would emerge, leaving pessimists outnumbering optimists.
Even so, the sector drawing the heaviest flows was semiconductors.
In the BofA survey, 45% of respondents named buying global semiconductor stocks as the most crowded trade in the market. Shorting U.S. Treasurys followed at 27%, ahead of buying the "Magnificent Seven," the group of seven large U.S. technology stocks that includes Apple and Nvidia, at 16%.
The share of respondents flagging crowding in semiconductor stocks fell from 82% in July to 53% in September and 45% in October, but it remains the highest of any trade.
Falling Behind Rivals Scares Managers More Than Falling Prices
The pattern of warning about an AI bubble while continuing to buy technology stocks reflects the performance competition that is particular to institutional investors.
Rob Isbitts, a columnist at Barchart, said institutional investors find it more burdensome to lag rival asset managers than to face a market decline itself.
Retail investors are driven by the fear of missing out on a rally, he said, while institutional investors watch the performance gap with their competitors. If a manager cuts exposure while technology stocks are rising and prices climb further, that manager can end up with a lower return than rival firms.
When the entire market falls, by contrast, a single firm is less likely to be judged as having made a bad call. That is why managers find it hard to trim technology holdings even as they worry about a bubble, he said.
Chip Rally Loses Steam as Investors Turn to Bonds
Enthusiasm for technology stocks remains strong, but the market is also showing signs that the momentum behind the rally could weaken.
Barchart said the iShares Semiconductor ETF (SOXX), which tracks the U.S. chip sector, recently fell below a key support level, and some trend indicators have turned bearish.
There are also signs that investor attention is shifting toward bonds.
In the October survey, 19% of respondents said they were already moving money out of equities and into bonds. Another 37% said they would increase bond holdings if the yield on the 10-year U.S. Treasury note reached 6%. At the time of the survey, the 10-year yield stood at about 5.19%.
The net share of respondents reporting an underweight position in bonds narrowed to 37% in October from 48% in September, indicating improved sentiment toward the asset class.
Investors also pointed to risks beyond an AI bubble. The biggest market risk cited in the October survey was a disorderly rise in government bond yields, at 31%, followed by an AI bubble at 23% and a resurgence of inflation at 20%.
Isbitts said that with exposure to technology stocks already heavy, investors should watch short-term price action and prepare for greater volatility rather than count on long-term gains alone.
BofA's October global fund manager survey was conducted from the 2nd to the 8th, with 185 fund managers overseeing a combined $512 billion in assets taking part.