Investors often fall in love with stocks. However, the best investors learn to invest unemotionally. This typically involves buying bad companies at great valuations, selling great companies at bad valuations, or buying wonderful companies at fair prices.
This theme seemed to play out in the third quarter of the year, as billionaires running large funds started to move out of high-flying artificial intelligence stocks like Nvidia (NVDA 2.94%) and Palantir (PLTR +3.03%) and into more traditional sectors that are admittedly quite boring compared to AI and high-growth tech. Billionaire investors even piled into a sector that investors have -- until recently -- ignored amid a two-year bull market. Let's take a look.
The boring trade
Artificial intelligence has been the main driver of this bull market, as investors believe AI could be the biggest technological innovation since the advent of the internet. Companies have spent heavily to compete in the new world. Investors have ponied up to be a part of it, seemingly buying any stock that has an AI narrative and a large potential market -- even if the size of the market and actual uses are still somewhat vague.
On the other hand, bank stocks have largely been ignored. Many view banking as a commoditized sector and banks have struggled with a range of issues including an inverted yield curve, a tougher regulatory landscape, a slowdown in mergers and acquisitions, several bank failures in 2023 that left a bad reputational overhang, and higher proposed capital rules. It's easy to see why investors weren't interested. Even after a big run in recent months, bank stocks have still greatly underperformed AI stocks and the broader market during this bull market.
In the third quarter, several billionaires got wary of AI valuations and began to like the setup for banks. The Federal Reserve had started lowering interest rates, which began to normalize the inverted yield curve. Banks prefer a steepening yield curve because they generally borrow money short and lend it out long. President-Elect Donald Trump's victory only stoked the flames, as investors saw an improving regulatory environment for banks, more mergers and acquisitions (M&A) and IPO activity, and continued economic growth.
Here are some sales of AI stocks and bank purchases that billionaire hedge fund managers made in Q3, which ended on Sept. 30. Keep in mind that a lot of these billionaires run massive funds or "pod shops" where small teams invest with company capital, so it's not always these billionaires making decisions directly. Additionally, not all of these sales and purchases are exclusive. In some cases, the funds mentioned below bought AI stocks and banks or sold both, but there's been a broadening in the market.
AI Sales
- Stanley Druckenmiller of Duquesne Family Office exited Nvidia and slashed his position in Palantir by 95%.
- Israel Englander's Millenium Management trimmed its Nvidia stake by 13% and its position in Palantir by 90%.
- Ray Dalio's Bridgewater Associates cut its position in Nvidia by 27%.
- Philippe Laffont's Coatue Management trimmed its Nvidia position by 27%.
Bank Buys
- Druckenmiller purchased more than 2.05 million shares of the SPDR S&P Regional Banking ETF (KRE 2.54%), making it a top-10 position in Duquesne's portfolio.
- Billionaire Ken Griffin's Citadel Advisors purchased more than 948,000 shares in KRE and more than 10.6 million shares in the embattled New York Community Bancorp.
- Billionaire Louis Bacon's Moore Capital Management purchased 950,000 shares of KRE.
Can the bank stock rally continue?
Banks have rallied over the last few months, so it's fair for investors to wonder if the rally is overheated. KRE is above levels not seen since early 2023, but still below levels experienced in early 2022. An important determinant of bank stock performance will be the yield curve, which recently reinverted briefly. As I mentioned above, banks want to see a steep yield curve. However, tailwinds including a better regulatory environment, the revival of investment banking and M&A, and better loan growth could continue to fuel the sector.
Now's the time to be a stock picker within the sector. There are still banks trading at fair prices, while some banks like JPMorgan Chase, which now trade at highs not seen since before the Great Recession, are starting to look pricey.
