AI stocks have been driving investor portfolios, but the hype around generative artificial intelligence is cooling, especially on Wall Street. The S&P 500 RavenPack AI Sentiment Index is up only 6% this year, lagging behind the overall market. Morgan Stanley reports a slowdown in AI spending.

Since the launch of ChatGPT in November 2022, AI data center ecosystem stocks have been responsible for significant S&P 500 returns and growth. Morgan Stanley warns of a potential slowdown in AI spending, signaling a shift in the market dynamics. The investment giant refers to recent AI stock returns as a “one-note narrative.”

Market experts caution that while AI spending may be slowing down, it is not expected to decline significantly in the long term. Companies are now looking for efficiency and clear returns on their AI investments, shifting from a sprint to a marathon approach. Morgan Stanley advises caution and strategic investment decisions in the evolving AI market landscape.

Morgan Stanley advises investors to consider selling small-cap, unprofitable tech stocks and low-quality meme stocks as AI expenditures reach a tipping point. Adding “real assets” like gold, REITs, and energy infrastructure to portfolios is recommended for diversification. Experts suggest taking a pause to evaluate AI stocks amidst changing market dynamics and potential overvaluation risks.

Market experts warn that the current valuation of AI stocks may be inflated and could underdeliver in the long run. It’s crucial for investors to conduct thorough research on the value proposition, company management, and potential competition before making investment decisions in the AI sector. Historically, highly valued stocks like AI have tended to be overpriced.

Read more at Yahoo Finance: Morgan Stanley warns AI stock boom is running out of steam