The Boring Trade Is On: Billionaires Dump AI Stocks, Embrace Banks

In a surprising turn of events, billionaire investors are shifting their portfolios away from high-flying artificial intelligence (AI) stocks and piling into the banking sector, a move dubbed the "boring trade." This shift, which occurred in the third quarter of 2024, is driven by a combination of factors, including changes in interest rates, regulatory environment, and economic growth prospects.



AI stocks, such as Nvidia and Palantir, have been the darlings of the market, driven by the AI boom. However, recent quarters have shown a slowdown in growth and increased volatility, leading billionaires to reduce their exposure to these stocks. For instance, Nvidia's revenue growth decelerated from 61% in Q1 2023 to 26% in Q2 2023, while Palantir's revenue growth slowed from 34% in Q1 2023 to 18% in Q2 2023. Additionally, both stocks have experienced significant price declines, with Nvidia down 55% and Palantir down 65% from their 52-week highs.



The regulatory environment around AI has also played a significant role in billionaires' decisions to scale back their investments in AI stocks. As AI becomes more prevalent, governments worldwide are implementing stricter regulations to address concerns about privacy, job displacement, and ethical implications. These regulatory uncertainties may have contributed to billionaires' cautious approach to AI stocks, prompting them to explore more traditional sectors like banking.

In contrast, the banking sector has been largely ignored due to issues like an inverted yield curve and regulatory challenges. However, several factors contributed to the billionaires' interest in banks. The Federal Reserve started lowering interest rates, normalizing the inverted yield curve, which banks prefer as they generally borrow money short and lend it out long. Additionally, President-Elect Donald Trump's victory was seen as stoking the flames of an improving regulatory environment for banks, more mergers and acquisitions, and continued economic growth.



Some specific opportunities within the banking sector that attracted billionaires' attention include the SPDR S&P Regional Banking ETF (KRE), which was purchased by Stanley Druckenmiller, Ken Griffin, and Louis Bacon, and the embattled New York Community Bancorp, bought by Ken Griffin. Despite the rally, it's fair to wonder if the bank stock rally is overheated, as KRE is still below levels experienced in early 2022. However, tailwinds like a better regulatory environment, the revival of investment banking and M&A, and better loan growth could continue to fuel the sector.

Now's the time to be a stock picker within the sector, as there are still banks trading at fair prices, while some like JPMorgan Chase are starting to look pricey. Investors should be cautious and exercise stock-picking skills within the sector, as not all banks offer attractive investment opportunities.

In conclusion, the shift in billionaires' investment strategies from AI stocks to the banking sector can be attributed to several broader economic and geopolitical factors. The Federal Reserve's decision to lower interest rates, the improving regulatory environment, and expectations of increased M&A and IPO activity have created a more favorable environment for banks, attracting billionaire investors like Stanley Druckenmiller, Ken Griffin, and Louis Bacon. However, investors should remain vigilant and exercise caution when navigating this changing landscape.