It’s time to buy the next leg of the AI story. Think global, says Citi, offering these stock picks.

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“No rush.”

That was Federal Reserve Gov. Chris Waller pounding the table over the need for patience on interest rate cuts in a much-anticipated speech on Wednesday night.

Some described that as a “hawkish sledgehammer,” after hopeful signals from Fed ChairJerome Powell a week ago, and that could make for a rough final trading session of the month Thursday.

Rain on the rate-cut parade comes as red flag warnings pop up across Wall Street over momentum stocks like artificial intelligence darling Nvidia NVDA, 0.65% which has been in the winner’s circle and an S&P 500 index driver in the past year or more.

But by now, investors know that even if AI is in a frenzy right now, the theme is here to stay. And our call of the day from a team of Citigroup strategists led by Drew Pettit say it’s “time to buy the next leg of the artificial intelligence trade.”

Firstly, more caution. They warn of “micro bubble risks,” due to sharp gains in certain pockets of the market, thus “investors should be discerning within the theme, especially for core holdings.”

They stress that investors have been overlooking lots of international names for U.S. stocks, even if the latter has been driving AI year-to-date returns. Their deep dive found “more stocks are contributing to performance upside, and expectations are for earnings growth to be better distributed across the AI value chain in the years ahead.”

Pettit and his team say now is “timely” for growth and value investors to broaden exposure, especially given the dilemmas they each face. For example, growth fans have to figure out what to do with stocks that have seen hefty gains.

“Conversely, their bearish counterparts may be worried about bubble risks in highfliers, like we saw in the unwinding of lower-quality U.S. names in 2022, even though they see structural gains for the theme longer term,” said Pettit and his team.

And value managers struggle with the largely growth-focused AI landscape, though by broadening out the theme, “pockets of value” can be found, says Citi. “The key is looking for names where AI exposures aligns with improving fundamentals.”

So their advice for growth investors is to take the “AI-at-a-reasonable-price approach,” while value investors should look at lower-multiple, or potential undervalued names where margins should expand.

“The end results provide broader regional and value chain exposure, lower beta relative to tech-heavy indices, and more attainable implicit fundamental expectations.”

As for the names flagged by Citi, they break down the stocks mapped out to AI through value chains — enablers, creators and users — offering two screens.

The first screen is the AI at a reasonable price basket. For example, on the creators list they flag AppLovin APP, 0.83%, Okta OKTA, 0.28%, BILL Holdings BILL, 2.47% and Smartsheet SMAR, 0.96% in the U.S., Wix.com WIX, 1.56% and Autoliv ALV, -0.63% in Europe and Japan’s Trend Micro 4704, -1.05%. Enablers: Intel INTC, 1.53%, Marvell MRVL, -1.23%, Broadcom AVGO, -0.05%, Zillow Z, -1.21% and TE Connectivitiy TEL, 0.08% in the U.S., BE Semiconductors BESI, -1.77% in Europe and Australia’s Goodman Group GMG, +1.93%. Users: Block, Veeva Systems Expedia Mastercard in the U.S., Thales, Europe’s Airbus and ABB and Japan’s Nidec and Panasonic.

For the AI value basket, in the creator segment they like U.S.-based Aptiv APTV, 0.66%, DocuSign DOCU, 0.75%, Electronic Arts EA, 0.60%, France’s Capgemeni CAP, -0.33% and Japan’s Toyota 7203, -0.31% TM, -0.18%. On the enabler list — HP HPQ, -0.10%, SS&C Technologies SSNC, 0.44% and NetApp NTAP, -0.28% in the U.S., Orange ORA, 0.68%, Royal KPN KPN, 1.05% and Hexagon HEXA.B, -0.43% in Europe and Canon 7751, -0.24% and Japan’s Nippon Telegraph and Telephone 9432, -0.83%. Users: Bank of New York Mellon BK, 1.07%, Bank of America BAC, -0.61%, Booking Holdings BKNG, -0.17% in the U.S., Siemens SIE, -0.14%, Airbus AIR, -0.31%, Zurich Insurance ZURN, 0.37% in Europe and Japan’s Nitto Denko 6988, -2.89%.

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