The AI stock plunge is just warming up: Citi strategist

AI might still be dominating financial headlines, but investors should take heed when too much of the narrative for these stocks is focused on euphoria and explosive growth potential.

At least that’s according to Drew Pettit, the director of US equity strategy for Citigroup.

Pettit — who warned about an AI stock pullback in early July — says fairly simple warning signs for investors include “when [a stock’s] price moves very, very, very fast.”

Another is when it seems like most shareholders aren't truly in the know, essentially buying stocks because they fear missing out on gains.

“I get the sense when it comes to AI, most investors have no clue what these companies do,” he told Yahoo Finance Executive Editor Brian Sozzi on the Opening Bid podcast (see video above or listen here).

The recent highs for tech stocks feel more like a distant memory, serving as a lesson to investors.

The Nasdaq Composite has shed about 6.5% since mid-July on fears of excess valuation in AI names and mixed earnings results from the likes of Alphabet (GOOG, GOOGL) and Microsoft (MSFT). AI darlings such as Nvidia (NVDA) and AMD (AMD) are off by 15% and 17%, respectively, during that timeframe.

That ripple effect in tech could make for some troubled waters in the coming months and quarters for investors more broadly, and betting on AI and tech might prove just as troubling.

Pettit says that on both the buy and sell sides, it remains a mystery to most as to what these AI companies will do in the next five years.

Their presentations about specific chips or products are more tangible, but “the market is pricing out what the company is going to become [while] not knowing what they will become,” he said.

A pullback in the stocks brings us closer to financial and valuation reality, per Pettit, who said we’re not in a bubble just yet since companies continue to beat and raise guidance. But he cautions that companies need to beat and raise for the next few years.

“To me, you see a broadening of AI because it can’t just be one or two names that win for this to be the next best thing,” he says. “It has to pull along way more stocks, way more types of companies.”

He favors AI from a structural standpoint and considers the space a game changer. “It’s one of our top themes,” he said.

Three times each week, Yahoo Finance Executive Editor Brian Sozzi fields insight-filled, market-focused conversations and chats with the biggest names in business on Opening Bid. Find more episodes on our video hub. Watch on your preferred streaming service. Or listen and subscribe on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.

In the below Opening Bid episode, Morgan Stanley chief investment officer Mike Wilson explains why he is looking for a 10% stock market correction.