Bank of America (BofA) has cautioned that the artificial intelligence (AI)-driven rally that has fuelled global equity markets could be losing momentum, as mounting concerns over monetisation and increasing competition threaten corporate earnings and investor returns.
In a European equity strategy note, the bank said the AI capital expenditure boom has created a market environment unlike anything seen over the past two decades. Massive investment in AI infrastructure has driven profit margin expectations to record highs while pushing risk premia to multi-decade lows.
However, BofA believes the favourable backdrop is becoming increasingly vulnerable.
The bank pointed to early signs that businesses are beginning to resist the high cost of AI services, with many companies rationing usage or turning to lower-cost open-source alternatives.
According to BofA, cheaper AI models are establishing a global pricing benchmark, while new technologies are making it easier for customers to switch providers, reducing vendor lock-in and increasing price transparency.
These developments, the bank argued, are paving the way for a more commoditised and competitive AI landscape than current market valuations suggest, potentially placing pressure on the elevated profit margins that investors have come to expect.
BofA also highlighted a notable shift in investor sentiment, observing that major US hyperscale technology companies have underperformed the S&P 500 by nearly 15 per cent since January.
The bank said this reflects growing unease over whether the substantial investments being made in AI will generate the returns anticipated by the market.
Despite easing macroeconomic concerns following the US-Iran peace agreement and stronger-than-expected growth in U.S. employment, BofA maintained its cautious stance on European equities.
The bank continues to favour defensive sectors over cyclical stocks, warning that AI-related industries, including semiconductors, capital goods and mining, appear among the most overstretched areas of the market.
Banks, which make up the largest weighting in the high-momentum trade, were identified as particularly exposed should the AI-driven rally reverse. In contrast, BofA said consumer staples offer a more attractive defensive position in the event of a broader pullback linked to weakening AI enthusiasm.
The warning underscores growing debate among investors over whether the rapid expansion of AI investment can continue to justify the lofty valuations that have driven global markets over the past two years.
