Hunting for the next AI all-star

As the SpaceX IPO moves ahead, how should investors be navigating valuation concerns?

Market recap

• Global equities had a bumpy stretch this week culminating in a nauseating Friday dip as strong labour market data reignited interest rate concerns and hopes for progress in the Middle East peace process faded.
• Despite a string of mostly solid corporate earnings, selling pressure on ‘Big Tech’ was also sparked by some underwhelming guidance which disrupted the AI-fueled rally.
• In North America, this was reflected in Nasdaq underperformance, which fell 4.7% compared to last Friday’s close.

AI

As markets evaluate the SpaceX initial public offering (IPO), valuations in the artificial intelligence (AI) space have come under heightened scrutiny, creating a challenging situation for investors who are bullish on AI but concerned about over-concentration. It is fair to say that there are valuations in certain segments of the market that look quite high, especially since late March, and SpaceX, OpenAI, and Anthropic—all of which are IPOs—will also have extraordinarily high valuations. Our approach is to be patient—not jumping into the IPOs with both feet, but rather finding other ways to play the AI theme. By looking at the AI tech stack—the combination of technologies required to create a particular application or product—we’ve been able to identify opportunities outside of the biggest and most expensive names. Right now, we’re long on memory stocks but underweight Nvidia and software after taking some profits. Going forward, we’ll continue to evaluate the market to identify where the next best opportunity is based on expected returns at a particular risk level. Agility is crucial; we need to ensure that we’re catching themes at the right time and pivoting away when spaces get over-saturated, markets price in the majority of upside, or competition gets fiercer. Investors who do opt to play the big AI IPOs should be prepared for some bumps in the road, especially if questions around revenues arise—Broadcom, for instance, recently posted an earnings miss, and its stock was punished as a result.¹

Bottom line: We’re opting not to chase the hype of the big AI IPOs, instead focusing on moving down the tech stack and the large cap space to find more attractive opportunities.

Inflation

With oil prices staying high amid geopolitical tensions, concerns about resurgent inflation are rising. So far, we have not changed anything in our risk profile with respect to our equity allocation or specific regions; strong fundamentals have kept those relatively static. However, oil prices staying elevated for a longer period of time does give us a reason to be more cautious. If we have stickier inflation, the U.S. Federal Reserve (Fed) could start to change its tune—more Fed officials would likely start to lean toward holding interest rates steady, or even raising rates. We are already seeing some of this both globally and in the U.S.: the European Central Bank (ECB) is expected to hike rates in both June and September,² while odds of a rate increase from the Fed before the end of the year shot up on Friday on the heels of a strong jobs report.³ Higher interest rates would also increase the cost of borrowing, which could put pressure on AI hyperscalers that have been using debt to finance their growth. On the consumer front, higher oil prices have largely been offset by tax refunds so far. However, those tax benefits are now finished, meaning that people will start to feel the full impact of higher prices on their pocketbooks moving forward. The longer this dynamic persists, the less likely it is that Fed can ignore it. Consumers have remained resilient, but it wouldn’t be a surprise to see some spending shifts in response to higher prices. That’s why, while we remain bearish on Consumer Staples, we’re now less bearish than we were previously; some consumers may need to come down the consumer goods spectrum as they increasingly feel the pain. Meanwhile, we remain neutral on Consumer Discretionary, mainly because the K-shaped economy (in which different segments of the economy diverge sharply) is allowing higher income-earners to keep spending.

Bottom line: Signals are mixed, with the economy hot but inflation and the potential for higher interest rates increasingly a concern. We think a wait-and-see approach is warranted, as the outlook could look slightly less bullish in coming quarters.

Bonds

How are changing macro conditions affecting fixed income markets? While we have seen yields pick up slightly of late, the potential for interest rate hikes means we don’t think this is a particularly good environment for bonds. It won’t be disastrous by any means, because multiple large rate hikes are unlikely. But the tone has shifted toward a more balanced view on rates rather than a potential rate-cutting environment. From an asset allocation standpoint, we now favour cash over bonds, but we still prefer equities over both. We simply think there remains more upside on equities. Within bonds, we took down some yield and credit risk because the trade-off did not appear to be worth it at the moment. We would prefer to take that risk on the equity side, where the potential for returns is higher.

Bottom line: If inflation calms down, the outlook for bonds could begin to look more optimism. For now, however, we still prefer equities.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report .

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Originally Posted June 8, 2026 – Hunting for the next AI all-star