AI tech trade may be fading and the stock market could face 'a sizable correction' if interest rates rise further, GAM Investments fund manager says

• Further interest-rate increases could lead to a major correction in stocks, according to a GAM Investments fund manager.

• Equity investors are currently facing a "laundry list" of problems including persistently high inflation and rates, Julian Howard said.

• Investors should to "wait it out" rather than heavily engage in the market, he added.

The massive artificial intelligence-driven rally in tech stocks may already be fading, and further rises in US interest rates could lead to a major correction in the stock market, according to Julian Howard, head of multi-asset solutions at GAM Investments.

Investors are facing a "laundry list" of problems including high inflation and borrowing costs, and it might be more appropriate for them to "wait it out" rather than take on significant risk exposure under current conditions, Howard told CNBC on Monday.

AI-focused tech shares such as Nvidia have outperformed the market this year, following the smashing debut of OpenAI's language tool ChatGPT. The chipmaker's stock, however, has retreated by close to 8% in the past week, paring its year-to-date advance to about 165%.

"I think there's a big risk around...the price of money, the reaction function of the Fed, higher rates...that hasn't gone away. It could actually get worse for the market," Howard said.

"The AI tech trade starts to fade in the latter half of last week, I think that could continue. Long duration assets like technology stocks – they are the most sensitive to the price of money, to the prevailing discount rate – and in fact, the discount rate starts to tick up as investors feel that actually the Fed isn't done after all," Howard said.

That could lead to a 'quite a sizable correction,' according to him.

The Fed has hiked benchmark rates by 500 basis points since early 2022 to contain inflation that hit 40-year highs last summer. Higher borrowing costs tend to reduce demand and pull down asset prices.

Further rate hikes would ramp up discount rates, leading to lower future cash flows. That could particularly weigh on mega-cap tech stocks that have led the market's rally since the beginning of 2023 - with the S&P 500 gaining 11% and the Nasdaq Composite advancing 26% so far this year.

It's time for the market to refocus on the risks posed by high inflation and rates, according Howard.

"The U.S. consumer is pretty ambivalent about inflation, it kind of expects higher inflation now, and that's dangerous because that entrenches higher inflation itself, because obviously expectations lead to higher inflation," he said.

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