Investors are flocking to high-beta, momentum-driven stocks like Palantir, Coinbase, and Nvidia, leading to extreme crowding levels, according to JPMorgan. This rush poses risks to both the segment and the broader market, signaling growing short-term complacency, with AI names like Tesla trading at high valuations.

JPMorgan warns of a rapid surge in high-beta, low-value, and speculative growth stocks, reaching unprecedented levels of crowding in just three months. Short interest has plummeted, indicating fewer investors are hedging against downside risks. This marks the third extreme overcrowding episode this year, leaving the market vulnerable to a pullback.

As April’s low-volatility crowding unwound within three months, JPMorgan recommends rotating back into lower-volatility names that have lagged the broader market. Blue-chip stock picks like Coca Cola and Allegion, previously underperforming, may outperform if speculative bets start to unwind.

JPMorgan sees a fragile market optimism driven by solid economic growth, falling inflation, and a dovish Fed. Crowded AI trades may face quick reversals, with risky non-AI stocks at even higher risk. Apollo Global Management economist Torsten Sløk echoes concerns, noting that P/E ratios of top S&P 500 companies have surpassed 1999 dot-com bubble levels.

Sløk questions buying tech companies at any valuation, pointing to inflated P/E ratios of AI standouts like Meta and Nvidia. He emphasizes the need for caution amid the current speculative market trends. The view of crowded AI trades as vulnerable to reversals is gaining traction on Wall Street, prompting a shift back to safety.

Read more at Yahoo Finance: AI and momentum trades are getting too crowded, blue chips may be the way to go: JPMorgan