How to Hedge an AI Bubble: BofA Shares ‘Perfect’ Trade for Investors

There’s a “perfect” trade for investors who are scared of getting caught in an AI-fueled bubble that could one day pop.

Strategists at Bank of America outlined what they believe is the “perfect hedge” to the booming artificial intelligence trade — “a way to invest in AI, without investing directly in AI,” they wrote in a note on Thursday.

Analysts said investors should look at “transition strategies” that benefit from proximity to AI but offer protection against “AI-driven swings, anchored by policy, geopolitics, and supply chain fundamentals.”

The bank, which said its analysts didn’t believe the bull market in stocks represented an AI bubble, acknowledged the risks to investors, particularly given high valuations in the tech sector. The Nasdaq 100 is trading at a price-to-earnings ratio of around 37x, compared to about 22x for the S&P 500.

Still, AI presents a significant opportunity for investors willing to maintain their exposure to the technology, the strategists said. The bank estimated that AI-related investment spending would triple to around $1.2 trillion by the end of the decade.

“We cannot ignore valuation debate and timing,” the strategists wrote. “We screen for high quality and growth ‘low-AI-beta’ Buy-rated companies,” they added, highlighting areas that could benefit from the AI trade while remaining adjacent to the tech sector itself.

If you’re looking to protect yourself from a bubble, here’s where the bank thinks you should put your money.

1. Electrification

Thesis: The demand for energy is expected to grow from AI, but the sector is mostly being driven higher by other catalysts, like new regulations, analysts suggested.

“We expect power & grid demand overall to remain very strong, driven by accelerating electricity demand fuelled by EVs, building electrification as well as growing global focus on energy independence,” they wrote.

2. Infrastructure and grid expansion

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