Wells Fargo analysts said the Iran war would only fuel the AI bubble.
The company warned customers in a note that while the AI trade bubble will continue to expand as the Strait of Hormuz is effectively closed, it does not believe it is time to sell AI or that the bubble is about to burst.
“There will be a breaking point at some point, but until then we see the closed channel actually facilitating AI bubble trading,” analysts wrote in a May 12 note. “You can’t own anything other than AI, and that’s how bubbles are formed.”
“We believe the closed channel contributed to the rise in AI in recent weeks; we couldn’t own anything but AI amidst macro concerns,” Wells Fargo said in a recent note this week.
Analysts said macro risks from the closure of the Strait of Hormuz will ultimately weigh on stock prices, as AI trade relies on billions of dollars in capital investment to fund AI. Wells Fargo said the spending would continue only if the rest of the economy holds up.
The Iran war could spur oil prices soar, raise inflation concerns, raise the odds of a Federal Reserve rate hike and send bond yields soaring, weighing on stock prices.
Middle East conflict and high oil prices have further clouded the outlook for stocks, leaving tech stocks stranded by investors looking for growth opportunities.
Despite claims that a bubble is forming in the AI industry, Wells Fargo doesn’t expect its stock to decline in the near term and is not bearish on the topic of AI overall.
“We expect the downside to be limited until growth slows, core inflation picks up significantly, or a war escalates into a hotly contested war,” the analysts wrote, adding, “Don’t fight to the tape, make the AI yours.”
The company said it expects AI’s contribution to total U.S. GDP to exceed 3% by the fourth quarter of 2026, the level at which investment in railroads, another major infrastructure development, will peak.
“While we still like AI, we expect the rate of rise to slow,” the analysts wrote.