The best of the AI trade could be behind us. Here's how to prepare, according to Barclays

By Nora Redmond

Strategists at Barclays said the artificial-intelligence trade could be entering a more mature phase.

Artificial intelligence no longer provides a "one-way trade" - it's time to be more selective about picks and to diversify, Barclays said.

Developments over the past week haven't helped to put investors' concerns to rest, a team at Barclays led by Emmanuel Cau, head of European equity strategy, wrote in a Friday note. It pointed to hotter-than-expected consumer price index and producer price index prints, which have raised the probability of a further interest-rate hike by the Federal Reserve.

At the same time escalating tensions in the Middle East, with ongoing strikes between the Iran-backed Houthi rebels and Saudi Arabia, have pushed oil prices higher. For most of the past month, Brent crude (BRN00) has remained above the $100 a barrel mark, and was hovering around $105 a barrel early Friday morning.

And on top of all that, chip stocks have declined, with the PHLX semiconductor exchange-traded fund SOXX down about 11% since the start of October, and the third-quarter reporting season has kicked off with a mixed start.

"The silver lining, though, is that bond yields have finally come down a bit, suggesting that bonds can still work as safe havens," the strategists wrote, adding that this means it doesn't make sense to worry about the artificial-intelligence trade and rising yields, as the two are interconnected.

Barclays continues to recommend a portfolio with a balanced sector allocation, especially as they no longer view AI stocks as a "one-way trade." The London-headquartered bank advises holding onto big tech stocks ahead of more third-quarter earnings reports to come from the industry, but their preference is for companies with proven strong business models, solid balance sheets, noticeable revenue streams and fair valuations.

Meta and Tesla will be the first of the Magnificent Seven - which also includes Alphabet, Amazon, Apple, Microsoft and Nvidia - to post financial results, with both set for after the closing bell on Oct. 21.

"As we have highlighted previously, we think the AI thematic is entering a more mature phase, where valuations, funding requirements, competitive threats, regulation, and revenue visibility are coming under much greater scrutiny," the strategists said. "It is certainly conceivable that the best of the AI thematic trade may be behind us, and therefore we think investors should be far more selective."

They also see Europe as a potential diversifier in global portfolios in the event of the AI trade unwinding further, as regions less exposed to the theme could provide some protection.

-Nora Redmond

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10-16-26 0622ET