Hedging the AI Bubble: Bank of America Recommends Gold and Chinese Stocks

Bank of America Corp strategists say that in the midst of the AI trading frenzy pushing up valuations, gold and Chinese stocks are the best hedge against this bubble or boom. Currently, the S&P 500 index's forward P/E ratio is about 23 times, significantly higher than the 16 times average over the past 20 years; the so-called "Tech Big Seven" account for over one-third of the index's weight, with a forward P/E ratio as high as 31 times. The Bank of America team led by Michael Hartnett wrote in their report, "The leadership position of AI stocks remains unshaken at the moment, and we see gold and Chinese stocks as the best hedge against the boom/bubble." Since hitting bottom in early April, this leading sector has driven the S&P 500 market value up by about $1.7 trillion. This week, chip manufacturer NVIDIA Corporation (NVDA.US) became the world's first company with a market value exceeding $5 trillion. In addition, strong earnings reports from Amazon.com, Inc. (AMZN.US) and Apple Inc. (AAPL.US) boosted U.S. stock futures on Friday; the market seems poised for a rebound, as some previous declines were attributed to Meta Platforms (META.US) plummeting due to investor concerns about massive AI investment spending. Bank of America strategists point out that investors are positioning their portfolios for robust economic growth in 2026, anticipating a decrease in U.S. interest rates and market-supporting policies from the Trump administration. Gold can hedge against the inflation risks arising from loose policies and economic expansion. Gold prices have recently retreated from their historical highs above $4,300 per ounce, partly due to investor assessment of progress in U.S.-China trade negotiations. Data shows that global gold funds saw a record outflow of $7.5 billion in a single week, following four consecutive months of net inflows. Chinese stocks have significantly outperformed the S&P 500 index so far this year, with the MSCI China index surging 33%, benefiting from optimistic expectations about China's competitive edge in AI after the rise of DeepSeek. When President Trump was elected, the Hartnett team correctly bet on international stocks such as those in Asia and Europe, believing that loose policies in these regions would drive stock market gains.