Investors Fear AI Boom-Bust Cycle But Stay Invested, BofA Says

Investors are increasingly concerned that the current artificial intelligence boom could end in a bust, yet most plan to remain invested to avoid missing out on further gains, according to a new report from Bank of America. The bank's strategists noted that while historical parallels to past technology bubbles are a major topic of discussion, the fear of underperformance is keeping market participants exposed to the sector.

AI Dominates Investor Discussions

In recent client meetings across the U.S. and Europe, BofA's European equity strategists found that AI capital spending accounted for 80% of discussion time. By comparison, interest rates represented 15% of conversations, while geopolitical topics like the Middle East conflict made up just 5%.

Clients frequently drew parallels between the current AI investment surge and previous technology-driven cycles that ultimately ended in a bust, such as the 1990s tech boom and the 1870s railroad boom, the report said. A primary concern shared by investors and the bank is the fierce competition among AI model developers, which is driving down prices and could undermine the spending boom.

Cautious but Committed Positioning

Despite these anxieties, BofA found that most clients see few immediate signs of a downturn and plan to stay positioned for more AI-related spending. The report noted that consensus forecasts for U.S. hyperscaler capital expenditures over the next 12 months are approaching $1 trillion and continue to rise.

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According to the bank, many investors feel that failing to participate in the ongoing rally entails "significant career risks." However, the strategists wrote that many clients also suggested "they were prepared to switch positioning on any signs that the boom was starting to run out of fuel."

Bank of America's Bearish Outlook

Bank of America itself maintains a negative outlook on European equities, warning that any disruption to AI spending could significantly harm economic growth and corporate earnings. The bank identified several potential obstacles, including:

• Intensifying competition
• Rising financing costs
• Power shortages for data centers
• Political opposition to new data center construction

The firm projects the Stoxx 600 index could fall approximately 10% to 580 by the second quarter. It also anticipates European cyclical stocks will underperform defensive stocks by another 6%, leading the bank to favor sectors like consumer staples.