The S&P AI bubble is too big; gold and Chinese stocks may be the best hedging tools.

As the artificial intelligence boom pushes US stock valuations to high levels, Bank of America strategist Michael Hartnett believes that gold and Chinese stocks are the best hedging tools in the current market environment to cope with the potential risk of an AI bubble. In a recent report, Hartnett stated, "The leadership of AI stocks is unlikely to be shaken in the short term, and we like to use gold and Chinese stocks as the best hedge against boom/bubble." The S&P 500's market capitalization has surged by $17 trillion since its low in early April, and recently, chip giant Nvidia's market capitalization surpassed $5 trillion. Market sentiment seems to remain optimistic. Strong earnings reports from Amazon and Apple recently boosted U.S. stock futures on Friday, with investors widely anticipating robust U.S. economic growth, lower interest rates, and potential market support policies from Trump in 2026. However, Hartnett's advice reveals a hidden risk beneath this optimism: the AI-driven rally has pushed market valuations significantly off historical averages. Against this backdrop, gold is seen as a hedge against the potential for renewed inflation due to economic expansion and loose monetary policy, while Chinese stocks offer an alternative investment option that has already demonstrated strong growth potential this year. High Valuations Raise Concerns About an AI Bubble

Bank of America's warning is primarily based on the current excessively high valuation levels of US stocks.Data shows that the forward price-to-earnings ratio of the S&P 500 has reached 23 times, far exceeding the average of 16 times over the past two decades. So far this year, the S&P 500 has risen by more than 16%.

The problem is particularly prominent among the "Mag7" tech giants.

These companies account for more than a third of the S&P 500 index, and their overall forward price-to-earnings ratio is as high as 31 times. Although Meta's stock price recently fell due to investor concerns about lower-than-expected returns on its massive AI investments, triggering a market correction, the overall trend has not reversed. Gold and Chinese stocks offer diversified options. The Hartnett team believes that gold is an effective tool for hedging against future inflation risks. The report points out that investors are positioning themselves for strong economic growth in 2026, and their expectations are based on the Fed's interest rate cuts and the possibility of Trump introducing pro-market policies. However, the combination of loose monetary policy and an expanding economy could become a breeding ground for renewed inflation. In this scenario, gold can fulfill its traditional hedging value. Although gold prices have recently retreated from their historical high of over $4,300 per ounce, its logic as a hedging tool remains valid. According to EPFR data, after four consecutive months of inflows, global gold funds experienced a record outflow of $7.5 billion in the most recent week. Besides gold, Bank of America strategists are also bullish on Chinese stocks. Since the beginning of this year, the Chinese stock market has significantly outperformed the S&P 500, with the MSCI China Index surging 33%. Behind this surge is market optimism regarding China's competitive capabilities in generative AI, especially after the rise of AI models like DeepSeek. It's worth noting that after Trump's last election, Hartnett and his team correctly bet on international stock markets in Asia and Europe, accurately predicting that loose monetary policies in these regions would drive up stock prices.