Bank of America warning: S&P AI bubble too big, gold and Chinese stocks could be the best hedging tools

As the AI boom pushes US stock valuations to record highs, Bank of America strategist Michael Hartnett believes that gold and Chinese stocks are the best hedging tools in the current market environment to counter potential AI bubble risks. In a recent report, Bank of America's Hartnett believes that "the leadership position of AI stocks will not be shaken in the short term, and we like gold and Chinese stocks as the best hedges for prosperity/bubbles." The market capitalization of the S&P 500 index has surged by $17 trillion since the low point in early April. Recently, chip giant NVIDIA Corporation (NVDA.US) surpassed a market value of $5 trillion. Market sentiment still appears optimistic. Strong earnings reports from Amazon.com, Inc. (AMZN.US) and Apple Inc. (AAPL.US) boosted US stock futures on Friday. Investors generally expect the US to experience robust economic growth, lower interest rates, and potential market support policies from Trump by 2026. However, Hartnett's advice reveals the risks hidden beneath the optimism, namely that the AI-driven rise has significantly deviated market valuations from historical average levels. In this context, gold is seen as a hedge against the economic expansion and loose policies that could reignite inflation, while Chinese stocks provide an alternative investment option that has shown strong growth potential this year. High valuations and concerns over the AI bubble Bank of America's warning is primarily based on the high valuation levels in the current US stock market. Data shows that the forward price-to-earnings ratio of the S&P 500 index has reached 23 times, much higher than the average level of 16 times over the past two decades. The S&P 500 index has risen over 16% so far this year. The issue is particularly pronounced in the "Mag7" tech giants. These companies now account for over one-third of the S&P 500 index, with an overall forward price-to-earnings ratio as high as 31 times. Although Meta's stock price has declined recently due to investor concerns about disappointing returns on its large AI investments, triggering a market correction, the overall trend has not reversed. Gold and Chinese stocks offer diversification options Hartnett's team believes that gold is an effective tool to hedge against future inflation risks. The report points out that investors are positioning themselves for robust economic growth in 2026, based on expectations of rate cuts by the Fed and potential pro-market policies from Trump. However, the combination of loose monetary policy and economic expansion could become a breeding ground for inflation to rise again. In this scenario, gold can play its traditional hedging value. Although the price of gold has dropped from its historical high of over $4,300 per ounce recently, the logic of using it as a hedge tool still holds. According to EPFR data, after four consecutive months of inflows, global gold funds experienced a record outflow of $7.5 billion in the past week. In addition to gold, Bank of America Corp's strategist also favors Chinese stocks. The performance of the Chinese stock market has far exceeded the S&P 500 index so far this year, with the MSCI China Index surging by 33%. Behind this rally is the market's optimism about China's competitiveness in the generative AI field, especially after the rise of AI models like DeepSeek. It is worth mentioning that after Trump's last election as president, Hartnett and his team correctly bet on international market stocks in Asia and Europe, predicting accurately that loose policies in these regions would drive stock market gains. This article is reproduced from "Wall Street See", author: Zhang Yaqi; GMTEight editor: Huang Xiaodong.