Bank of America cautioned that the momentum rally driven by artificial intelligence may be waning, highlighting increasing risks related to monetisation and commodification that could exert pressure on corporate earnings and equity markets worldwide. In a European equity strategy note, BofA indicated that the AI capital expenditure boom has generated “a macro and market environment unlike anything investors have seen over the past two decades,” elevating margin expectations to unprecedented levels and compressing risk premia to levels not seen in decades.

However, the bank perceives that the environment is currently facing significant threats. BofA highlighted indications that end users are resisting AI pricing, with corporations “beginning to ration usage and/or shift to cheaper open-source alternatives.” Lower-cost models are “establishing a global price anchor,” while new tools are reducing vendor lock-in and increasing price transparency, indicating “a more commoditised and competitive landscape than implied by record margin expectations. The bank observed that U.S. hyperscalers have lagged behind the S&P 500 by nearly 15% since January, characterising this as an indication of “growing investor unease about expected returns.”

BofA maintains a pessimistic outlook on European equities, even in light of diminished macroeconomic risks stemming from the U.S.-Iran peace agreement and a resurgence in U.S. employment growth. The bank maintained an underweight position in cyclicals relative to defensives, characterising AI enablers such as semiconductors, capital goods, and mining as “most stretched.” It cautioned that banks, being the largest sector in the high-momentum basket, are exposed to significant risk of underperformance in the event of a momentum reversal, while staples were identified as the favoured defensive positioning during any AI pullback.