As artificial intelligence continues to dominate market narratives and drive stock valuations to historically elevated levels, strategists at Bank of America Corporation are recommending that investors consider Chinese equities and gold as the most effective hedges against potential volatility in the AI-driven equity boom. This recommendation comes at a time when concerns about stretched valuations and concentration risk in United States technology stocks are prompting investors to reassess their portfolio positioning and seek diversification strategies that could provide protection if the current rally falters.
Unprecedented Valuation Levels in US Equity Markets
The current state of United States equity market valuations provides essential context for understanding Bank of America’s hedging recommendations. The S&P 500 Index, which serves as the primary benchmark for large-cap American equities, is currently trading at 23 times forward earnings. This valuation metric, which divides the index’s price by analysts’ expectations for earnings over the next twelve months, stands well above the index’s historical average of 16 times forward earnings over the past two decades.
This substantial premium to historical norms reflects the market’s optimistic expectations about future corporate profit growth, but it also indicates that investors are paying significantly more for each dollar of expected future earnings than they have on average over the past twenty years. Such elevated valuations can be justified by exceptional growth prospects, but they also leave less room for disappointment and can make markets more vulnerable to corrections if expectations aren’t met or if economic conditions deteriorate.
The valuation picture becomes even more pronounced when examining the so-called Magnificent Seven—a group of technology megacap companies that have come to dominate the US equity market. This cohort, which has driven much of the market’s gains in recent years, now accounts for more than one-third of the S&P 500 Index’s total weight. The concentration of market value in such a small number of companies represents a significant shift in market structure and creates concentration risk for investors who hold broad market index funds.
The valuations across the Magnificent Seven group are even more elevated than the broader market, trading at 31 times forward earnings. This premium valuation reflects investors’ conviction that these companies are best positioned to capitalize on artificial intelligence and other technological trends, but it also means these stocks have less margin for error should growth disappoint or competition intensify.
Bank of America’s Hedging Strategy
Against this backdrop of elevated valuations and market concentration, the Bank of America strategist team led by Michael Hartnett has articulated a clear perspective on portfolio positioning. In a research note to clients, the team stated: “AI equity leadership ain’t budging for time being and we like gold & China stocks as best boom/bubble hedges.”
This recommendation acknowledges the reality that artificial intelligence-related stocks continue to dominate market leadership and show no immediate signs of relinquishing that position. Rather than recommending that investors fight this trend by avoiding AI-related equities entirely, the strategists suggest maintaining exposure to the AI theme while simultaneously establishing positions in assets that could provide ballast if the AI boom eventually transitions into a bubble that subsequently deflates.
The choice of gold and Chinese stocks as the preferred hedges reflects careful analysis of how these assets might perform under various scenarios. Gold has historically served as a store of value during periods of market stress, currency debasement, and heightened uncertainty. Chinese equities, meanwhile, offer exposure to a large, dynamic economy with its own AI capabilities and growth drivers that don’t move in perfect lockstep with United States technology stocks.
The Magnitude of the AI-Driven Rally
The scale of the market rally driven by artificial intelligence enthusiasm is genuinely remarkable. Since the S&P 500 Index bounced off an early-April low, the benchmark has added an extraordinary $17 trillion in value. This wealth creation, which exceeds the entire gross domestic product of most countries, reflects both genuine business growth and expansion in valuation multiples as investors have become increasingly willing to pay premium prices for exposure to AI-related businesses.
At the center of this AI-driven surge sits Nvidia Corporation, the semiconductor company whose graphics processing units have become essential infrastructure for training and running artificial intelligence models. This week, Nvidia achieved a historic milestone by becoming the world’s first company to reach a $5 trillion market valuation. This achievement underscores both the enormous market opportunity that artificial intelligence represents and the concentrated nature of the current market rally, where a single company’s valuation now exceeds the combined economic output of all but a handful of nations.
Recent Earnings Results and Market Dynamics
The resilience of the AI-driven market rally was on display in recent trading sessions. Strong earnings reports from Amazon.com Inc. and Apple Inc. provided a boost to United States equity futures on Friday, suggesting the market was poised to rebound after experiencing some turbulence earlier in the week.
That turbulence had been driven in part by a significant plunge in Meta Platforms Inc.’s stock price. The social media and technology conglomerate’s shares fell sharply amid investor concerns that the massive investments technology companies are making in artificial intelligence infrastructure, research, and development might not generate commensurate returns. This concern about return on AI investment represents one of the key risks facing the sector—companies are spending tens of billions of dollars on AI capabilities, but the timeline and magnitude of revenue generation from these investments remains uncertain.
The mixed signals from earnings season—with some companies demonstrating strong results while others face questions about AI spending payoffs—illustrate the complexity of the current market environment and reinforce the potential value of hedging strategies.
Investor Positioning and Economic Expectations
According to Bank of America’s analysis, investors are currently positioning their portfolios based on expectations of solid economic growth continuing into 2026. This positioning reflects several interconnected assumptions about the economic and policy environment.
First, investors expect United States interest rates to fall from current levels as the Federal Reserve continues to adjust monetary policy in response to economic conditions. Lower interest rates generally support higher equity valuations by reducing the discount rate applied to future earnings and by making stocks more attractive relative to fixed-income alternatives.
Second, market participants anticipate that President Donald Trump will implement policies supportive of equity markets. This expectation might encompass various potential policy actions, including tax measures, regulatory approaches, or other initiatives that could benefit corporate profitability or economic growth.
Within this framework of expectations, gold serves a specific hedging function. The precious metal offers protection against the risk that accommodative monetary policy combined with robust economic expansion could fuel inflation. If interest rate cuts and economic growth lead to rising prices throughout the economy, gold has historically tended to maintain or increase its value, providing a hedge against the erosion of purchasing power that inflation creates.
Gold Market Dynamics and Recent Flows
Gold prices have experienced significant volatility recently, retreating from all-time highs above $4,300 per ounce. This pullback has been driven in part by investor assessments of progress toward reducing trade tensions between the United States and China. Any movement toward a trade truce could reduce some of the geopolitical uncertainty that has supported gold prices, as the precious metal tends to benefit from safe-haven demand during periods of heightened international tensions.
Recent fund flow data provides additional insight into gold market dynamics. According to data from EPFR cited by Bank of America strategists, outflows from global gold funds reached a record $7.5 billion in the latest weekly reporting period. This substantial outflow is particularly noteworthy because it follows four consecutive months of inflows into gold funds, suggesting a meaningful shift in investor sentiment toward the precious metal.
Despite these outflows, Bank of America’s strategists continue to view gold as an attractive hedge against risks in the AI equity boom, suggesting they believe the recent weakness may represent a buying opportunity rather than the beginning of a sustained bear market in precious metals.
Chinese Equity Performance and AI Competition
Chinese stocks have delivered impressive performance in 2025, sharply outperforming the S&P 500 Index. The MSCI China Index, a broad measure of Chinese equity market performance, has surged 33 percent year-to-date, representing substantial gains that have exceeded returns in most other major markets.
This outperformance has been fueled significantly by optimism about China’s ability to compete effectively in generative artificial intelligence technology. The emergence of DeepSeek, a Chinese AI system that demonstrated capabilities comparable to leading Western AI models while reportedly requiring substantially less computing power and investment, catalyzed enthusiasm about Chinese technological competitiveness and the potential for Chinese companies to capture meaningful share in the global AI market.
However, some momentum has dissipated from the Chinese equity rally more recently. The MSCI China Index appears poised to snap a five-month winning streak as investors’ attention has shifted back to persistent challenges. These include ongoing tensions in the United States-China relationship, despite some recent diplomatic engagement, and fundamental economic headwinds facing China’s economy, including challenges in the property sector, demographic pressures, and questions about the sustainability of growth rates.
Bank of America’s Track Record on International Markets
Bank of America’s recommendation carries additional weight given the strategist team’s successful previous calls on international equity markets. Michael Hartnett and his colleagues correctly positioned for outperformance in international stocks, particularly those in Asian and European markets, following Donald Trump’s election victory. Their thesis centered on the expectation that accommodative monetary and fiscal policy in these regions would fuel equity gains, and this call has proven prescient as these markets have indeed delivered strong returns.
This track record of accurately forecasting international market performance lends credibility to the current recommendation to use Chinese stocks as a hedge against concentration risk and elevated valuations in United States AI-related equities.
Strategic Implications for Investors
The Bank of America recommendation to use gold and Chinese stocks as hedges against the AI equity boom reflects a nuanced view of current market conditions. Rather than calling for investors to abandon AI-related stocks or predicting an imminent market crash, the strategists are suggesting a balanced approach that maintains exposure to the dominant market theme while establishing positions that could provide downside protection or diversification benefits.
For investors implementing this strategy, the approach would involve maintaining core holdings in United States equities, including AI-related names, while allocating portions of their portfolios to gold and Chinese equities. The specific allocation to these hedge positions would depend on individual risk tolerance, investment timeline, and conviction in various market scenarios, but the fundamental logic of diversification and hedging against concentration risk appears sound given current market conditions and valuation levels.
Acknowledgment: This article was written with the help of AI, which also assisted in research, drafting, editing, and formatting this current version
