Investing.com -- The AI trade became too crowded as funds piled into the stocks related to the burgeoning technology, likely contributing to the sharp sell-off following DeepSeek’s launch of its R1 model, Bank of America analysts said in a note.
Broadcom (NASDAQ:AVGO), a key AI player, saw its shares plummet by 17% on Monday. According to BofA, the chipmaker experienced a significant jump in ownership breadth, with 56% of US large-cap funds holding the stock at the end of 2024 compared to just 38% at the end of 2023.
“AI/tech companies with the biggest increase in ownership breadth (proportion of funds owning the stock) over the last year were hit hardest by the headline,” BofA analysts led by Savita Subramanian noted.
Looking forward, BofA also touched on the theme of deregulation, an important topic during the early days of President Trump's administration.
The bank said that deregulation could potentially boost productivity, enhance earnings visibility, and lead to a re-rating of stocks. However, it also pointed out that the current market positioning does not fully align with the anticipated benefits of deregulation.
Within the financial sector, there is a bias in ownership towards companies based on their level of regulation, with the most heavily regulated firms, such as Global Systemically Important Banks (GSIBs), being underweight in portfolios.
In contrast, regional banks have moved to near market-weight, and private lenders and alternative financial companies, which face lighter regulatory scrutiny, have been favored by investors for some time and are significantly overweight.
Last week, at the World Economic Forum in Davos, business leaders echoed US President Donald Trump's call for the EU to reduce regulation and boost competition to stay competitive with other developed markets.
Speaking via video conference, Trump criticized the EU’s trade policies toward the US and warned that companies should manufacture in America or face tariffs.
His push to roll back corporate regulations in the US has intensified the EU’s ongoing debate on improving competitiveness.