A veteran Jefferies strategist is urging investors to consider a rotation into quality, low-stress stocks as concerns mount over AI monetization.
Desh Peramunetilleke, Jefferies’ head of quantitative strategy, says markets are grappling with whether technology companies are building excess capacity in artificial intelligence infrastructure.
A Jefferies report titled “AI fatigue and rotation” notes that “the new quarter has begun with much talk of ‘AI fatigue’ as investors look out for a peaking out of momentum and rotation into cheaper ‘value’ names which have not been part of the AI trade.”
The S&P 500 momentum index has outperformed the broader stock market by more than 70% since 2024, approaching levels last seen during the dot-com era of the 1990s.
Hyperscale cloud providers face growing scrutiny over whether they can generate adequate returns on an estimated $700 billion in AI-related capital spending, Jefferies noted.
The report warned that AI stocks alone are now driving momentum strategies, “increasing the risk of an unwind on adverse sentiment” if enthusiasm begins to fade.
Jefferies said the quarterly earnings results of Alphabet (GOOGL), Amazon (AMZN), Meta (META), and Microsoft (MSFT) will serve as the next major test for the AI trade overall.
“This is why the next quarterly earnings announcements for the hyperscalers due to commence on 22 July will provide the next stress test for the AI story in general,” the report said.
Despite recent turbulence, Jefferies maintained that corrections in AI-related stocks are natural, adding, “So long as the AI capex arms race continues the beneficiaries will remain the picks and shovels trade.”
“While we still see the theme as a long-term winner, the above reasons could drive an unwinding of the AI-led momentum,” Peramunetilleke said.
To navigate potential volatility, Jefferies screened for stocks with market capitalizations above $10 billion, high quality scores, long-term free cash flow yields exceeding 3%, and forward price-to-earnings ratios below 20 times.
Jefferies expects AbbVie (ABBV) to deliver compound annual earnings growth approaching 28% between 2026 and 2027, while generating a free cash flow yield of approximately 5.2%.
AbbVie recently agreed to acquire Apogee Therapeutics in a deal valued at approximately $10.9 billion, its largest acquisition in more than five years, bolstering its immunology business.
The company also reported $15 billion in first-quarter worldwide revenue, including $7.3 billion from its immunology portfolio, with shares gaining roughly 37% over the past year.
Netflix (NFLX), carrying a $320 billion market value and a 3.6% free cash flow yield, also ranked highly in Jefferies’ quality screening model.
The dominant streaming platform forecast second-quarter revenue growth of 13% despite warning that content spending would be weighted toward the first half of the year.
Other companies appearing on Jefferies’ quality, low-stress screen include Lowe’s Companies (LOW), McDonald’s (MCD), and American Express (AXP).
The bank also noted that a shift away from expensive AI-linked stocks could benefit markets outside the AI trade, including opportunities in China and India.
