The AI craze drove investors to pour a record $8.5 billion into tech funds last week, Bank of America says

• Investors poured a record $8.5 billion of cash into tech funds last week, Bank of America found.
• They're piling into the sector with the Nasdaq Composite on a tear, up 25% year-to-date.
• The AI "baby bubble" has become the dominant theme for markets, strategist Michael Hartnett said.

Investors are piling more cash into tech stocks than ever before thanks to the artificial intelligence craze, according to Bank of America.

Tech funds brought in a record $8.5 billion in the week ending May 31, the bank found.

AI is probably fueling inflows into the sector, a team led by strategist Michael Hartnett said in a note to clients on Friday.

The explosion of interest in ChatGPT at the start of the year ignited an AI frenzy for investors, with big names like Bill Ackman and Stanley Druckenmiller loading up on related stocks.

That's driven a tech boom, with the Nasdaq Composite index up 25% in 2023 and blue-chip names Nvidia and Meta racking up triple-digit returns in the first five months of the year.

There's a risk the tech rally will fizzle out soon, according to Hartnett, with technical analyses suggesting the sector may be overbought.

The strategist has previously said there could be an AI "baby bubble" that echoes the excessive valuations of internet-related stocks in the early 2000s before the dot-com crash.

He said in Friday's note that he's still bearish on equities as an asset class, with the Federal Reserve potentially revving up for further interest-rate hikes later this year as it presses ahead with its war on inflation.

Stocks tend to fall when rates rise because investors are able to get higher returns by parking their cash in government bonds and savings accounts.

Tech companies' share prices tend to take a particular hit because their valuations are often reliant on borrowing cash — which becomes more expensive when the Fed tightens — and price in their future growth, which might be slower if the wider economy cools.

Contrarian-minded investors should sell AI stocks and buy shares in Hong Kong-listed companies, which could benefit from China's efforts to revive its faltering economy, Hartnett said.

Read more: Tech stocks are outperforming their rivals by the most since the dot-com bubble