Overview
Bank of America has flagged that the AI-led momentum which underpinned recent market gains may be weakening. In a European equity strategy note, the bank warned that the AI capital expenditure boom has produced a macro and market backdrop unlike anything seen in the last two decades - one that pushed margin expectations to record highs and compressed risk premia to multi-decade lows. BofA now sees that environment as increasingly vulnerable.
Customer pushback and pricing dynamics
The bank points to emerging evidence that end users are resisting current AI pricing, with corporate customers "beginning to ration usage and/or shift to cheaper open-source alternatives." These behaviors, BofA says, are helping lower-cost models to establish a global price anchor. At the same time, new tools are lowering barriers to switching and enhancing price transparency, weakening vendor lock-in and increasing competitive pressure.
Implications for margins and market structure
Taken together, these forces suggest a more commoditised and competitive landscape than the record margin expectations imply. BofA warns that further spread of lower-cost alternatives and heightened price transparency could exert downward pressure on profitability for firms positioned as AI enablers.
Market signals and sector positioning
The note observes that U.S. hyperscalers have lagged the S&P 500 by nearly 15% since January, which the bank interprets as growing investor unease over expected returns. Despite an easing of some macro risks - including a cited U.S.-Iran peace development and a rebound in U.S. jobs growth - BofA remains negative on European equities and retains an underweight stance on cyclicals versus defensives.
BofA identifies semiconductor makers, capital goods firms and miners - grouped as AI enablers - as the most stretched areas relative to current expectations. The bank also highlights banks, which make up the largest share of the high-momentum basket, as having elevated downside risk if momentum reverses. Consumer staples, by contrast, are flagged as the preferred defensive exposure in the event of an AI pullback.
Concluding note
Bank of America’s analysis frames a scenario in which rapid AI-driven capex lifted market optimism to extremes, but evolving pricing dynamics and ease of substitution may be reversing those gains. The bank’s sector preferences emphasize a defensive tilt while cautioning against crowded positions among AI enablers.