Wall Street thinks the “pain trade” is for AI stocks to keep soaring

As US stocks continue to make their near bear market in April look like a distant memory, the new leaders are the old leaders: all AI, all the time.

On Monday, Bespoke Investment Group flagged that its AI “picks and shovels” basket was effectively back at pre-DeepSeek levels. And with the surge in Constellation Energy after this morning’s deal with Meta, it’s a safe bet that basket is now at all-time highs.

(Note: ATN in above chart is a typo; it should be ANET.)

In thinking through potential “pain trades” — that is, developments that would annoy everyone — 22V Research’s chief market strategist suggested one path is that “the current trends keep working, and investors get increasingly frustrated waiting for Growth, Momentum, and Quality to correct (we lean this way).”

The growth and momentum factors are geared toward many of the AI-centric names.

For something to be a pain trade, it needs to bother people. And for it to bother people, they need to not own it as it goes up (or, conversely, everyone needs to own it as it goes down). To that point...

“Tech saw the biggest outflows for the third straight week, with all major client groups (institutions, hedge funds, retail) selling Tech last week,” Bank of America strategist Jill Carey Hall wrote, adding that her colleagues recently upgraded tech from underweight to market weight. “Our positioning work suggests that Tech is close to a record underweight by active funds.”

Beyond those picks and shovels that support the AI boom through providing the necessary infrastructure and energy for data centers, there are also, of course, the chip stocks themselves. Broadcom hit an all-time high this morning, and Nvidia’s post-earnings romp higher continues.

“Nvidia rallying 3.2% post-earnings after beating estimates despite a higher-than-expected China-driven inventory write-off demonstrates AI demand resilience,” BofA strategist Benjamin Bowler wrote. “With many remaining skeptical of the return of US exceptionalism, US tech outperforming is still a pain trade.”

Bowler is recommending exposure to positions that benefit from US stocks up and volatility up through year-end.

This resurgence in AI data center stocks comes even as private US construction spending on data centers appears to be well off the boil.

“It’s not obvious to me whether a) this is one last gasp before the apex, and DeepSeek was indeed the beginning of the end. Or b), we’ve just been consolidating, and the AI capex cycle has many more months or years to go,” wrote Brent Donnelly, president of Spectra Markets. “I would say a daily close above $154 in NVDA will put an end to any skepticism for the time being.”