What are active managers doing these days? Buying AI says BofA

AI and technology stocks are now core holdings among active funds, strategists at Bank of America said in a Friday note.

“We screened the S&P 500 for stocks that saw the largest increase in ownership breadth over the last 12 months (measured by the percent of funds owning each ticker). Unsurprisingly, nine of 10 stocks on our list are AI or Tech-related,” strategists wrote, with the only exception being pharma giant Eli Lilly and Company (NYSE:LLY).

This trend is further supported by a positive correlation between the number of "AI" mentions on earnings calls and the change in fund ownership for these stocks, BofA added.

The note also reveals that NVIDIA Corporation (NASDAQ:NVDA) has become a key holding, owned by 68% of funds and overweight by approximately 50%. According to BofA’s team, the company’s post-earnings 10% jump in the face of a broader market decline indicates that the stock welcomed even more new buyers.

“The market continues to feel narrow, especially with positive YTD revisions for the Mag 7 and cuts for the remaining 493,” strategists said.

“But we also see beneficiaries of AI in less crowded "old economy" stocks, where we expect re-rating in labor-intensive services stocks' multiples as they grow more efficient via AI/automation,” they added.

In addition to AI, the report highlights a growing bias among long-only funds towards stocks with high projected long-term growth (LTG) over those with high dividend yields. The aggregate dividend yield of these funds' holdings is now near a record low compared to the S&P 500.

BofA believes this shift could pose a risk to fund performance, as high dividend yield stocks might lead the market.