Institutional Funds Shift from AI Small Caps to Defensive Stocks
Prefer us on GoogleThe indiscriminate buying of AI semiconductors and tech stocks is weakening. Institutional funds are moving out of small AI stocks and into defensive sectors such as finance and healthcare. Paradis Labs analyzed that while the AI supply chain is expected to rise in the first and second quarters of 2026, this is attributed more to a recovery in valuations rather than improvements in corporate fundamentals. After deleveraging in July, institutional investors showed signs of reducing their exposure to small AI stocks in the US and Europe while buying defensive assets. European funds are adopting a cautious stance towards high-risk AI stocks, which can be interpreted as a movement to reassess the balance between risk and return. Paradis Labs is focusing on companies that adopt AI and has suggested selection criteria based on having a difficult-to-replicate business moat and strong cash conversion efficiency. Notable examples include Uber, Netflix, and Meta. The costs of AI infrastructure and operational complexity are significant variables affecting the performance of companies' AI adoption. The investment logic is shifting towards selecting companies where AI adoption can translate into actual business metrics, rather than encompassing the entire AI supply chain.
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