Billionaires Shift Focus: Moving from AI Stocks to Traditional Banking Sectors

Investors often develop a strong attachment to certain stocks. However, the most successful investors adopt a more unemotional approach. This means they may buy undervalued companies that aren’t doing well, sell off great companies when their prices seem too high, or invest in outstanding companies at fair valuations.

This concept became quite noticeable in the third quarter of the year. Billionaires managing large investment funds began to sell off their high-flying artificial intelligence stocks, such as Nvidia and Palantir, to invest in more conventional and arguably dull sectors. These traditional sectors had been largely overlooked for two years amidst a bull market focused on AI. Let's explore this trend further.

The Boring Trade

Artificial intelligence has driven much of the optimism in the stock market recently. Many investors believe AI could lead to significant technological advancements, comparable to the rise of the internet. Companies have heavily invested to position themselves in this evolving landscape, and investors bought stocks with even a hint of AI potential, regardless of the unclear scaling of these technologies.

On the flip side, the banking sector has often been neglected. Many see banking as a commoditized business that has faced several hurdles. Issues like an inverted yield curve, stricter regulations, declining merger activity, and even recent bank failures have dissuaded investment interest. Although bank stocks recently saw some growth, they still lag behind both AI stocks and the broader market significantly.

During the third quarter, several billionaires began to re-evaluate their positions. Concerns about elevated AI stock valuations prompted them to look favorably at banks, particularly as the Federal Reserve started to lower interest rates, normalizing the yield curve. A steeper yield curve is generally advantageous for banks, as they borrow at short-term rates and lend at long-term rates. Additionally, with favorable political changes and a reviving economy, many investors began to express increased interest in banks.

Here are some notable sell-offs of AI stocks and investments in banks made by prominent hedge fund managers in the third quarter, which ended on September 30:

AI Stock Sales

• Stanley Druckenmiller of Duquesne Family Office exited his entire position in Nvidia and reduced his holding in Palantir by 95%.
• Israel Englander's Millennium Management reduced its stake in Nvidia by 13% and its holding in Palantir by 90%.
• Ray Dalio's Bridgewater Associates cut its position in Nvidia by 27%.
• Philippe Laffont's Coatue Management also trimmed its stake in Nvidia by 27%.

Bank Purchases

• Druckenmiller acquired over 2.05 million shares of the SPDR S&P Regional Banking ETF (KRE), making it one of the top-10 holdings in his portfolio.
• Billionaire Ken Griffin's Citadel Advisors invested more than 948,000 shares in KRE and over 10.6 million in New York Community Bancorp.
• Billionaire Louis Bacon's Moore Capital Management bought 950,000 shares of KRE.

Will the Bank Stock Rally Continue?

Bank stocks have experienced a rally in recent months, leading investors to question if the surge might be excessive. KRE is currently trading at levels not observed since early 2023, but still below its early 2022 highs. The performance of bank stocks will likely depend on the status of the yield curve, which has recently seen a brief inversion. Banks typically prefer a steep yield curve to operate successfully. However, positive trends such as improved regulations, a resurgence in investment banking, and increased loan growth could support the sector going forward.

Investors should take this time to selectively pick stocks within this sector. While many banks are trading at reasonable prices, some, like JPMorgan Chase, now appear to be valued at their highest levels since before the financial crisis and may seem overpriced.

Investors, Stocks, Banks, AI, Valuation