The rapid rise in artificial intelligence and semiconductor stocks may be entering a more fragile stage, with Barclays warning that investors should be prepared for a possible short-term correction.
The bank said the recent gains have been unusually strong. The MSCI World Semiconductors Index has climbed about 50% in the past two months, making it one of the biggest advances seen in more than 20 years.
Crowded positioning raises risks
Barclays strategists, led by Emmanuel Cau, said momentum investors and systematic trading strategies have played a major role in driving the rally.
However, they warned that support from those investors may be fading as exposure levels become increasingly stretched.
A wave of technology IPOs and capital-raising deals could also compete for investor money, leaving less liquidity for existing stocks.
June brings key tests
The bank said several events in June could challenge the market’s momentum.
Investors are watching:
- The Federal Reserve’s June policy meeting under new leadership.
- The European Central Bank’s expected tightening path despite weaker economic growth.
“The combination of frothy technicals and a catalyst-heavy June suggests that the chances of a tactical pullback, especially in the narrow momentum space, cannot be dismissed,” the strategists wrote.
Long-term outlook remains positive
Despite the near-term risks, Barclays said it remains constructive on equities overall.
The bank pointed to:
- Strong corporate earnings.
- Long-term investment trends.
- Speculative activity that remains confined to a relatively small part of global markets.
“To be clear, we are not bearish Semis. But given the parabolic price action across the space recently, if it were to take a breather, this would likely play in favour of some rotation into less Tech heavy regions,” the strategists said.
Rotation could benefit other sectors
If semiconductor shares lose momentum, Barclays expects investors to look at other areas of the market.
Potential beneficiaries include:
- Software companies.
- Aerospace and defence stocks.
- Consumer discretionary sectors.
Among consumer-related industries, the bank highlighted:
- Luxury goods.
- Tourism.
- Leisure activities.
Barclays also said progress toward a US-Iran agreement could encourage investors to move away from crowded AI trades and support markets that have lagged the technology-led rally.
TL;DR:
Barclays said the sharp rally in AI and semiconductor stocks may be vulnerable to a short-term correction. While the bank remains positive on equities and chip stocks over the long run, it expects crowded positioning and several June catalysts to increase the risk of a pullback.
AI summary:
- Barclays warned AI and semiconductor stocks may be due for a pause.
- The MSCI World Semiconductors Index has risen about 50% in two months.
- Crowded positioning and June policy events could trigger a pullback.
- The bank remains positive on chip stocks over the longer term.
- Software, aerospace, defence and consumer sectors could benefit from any rotation.