The concentration of gains in a small group of AI-linked stocks means index-level resilience may be hiding weakness underneath, leaving headline indices exposed if sentiment on AI cracks. On BofA’s reading, AI-related earnings, capex updates and any sign of slower spending could become bigger swing factors for US equities than moves in yields, at least until yields climb further. Traders may want to watch the gap between AI leaders and the broader market, including small caps, as a gauge of how much the “AI put” is doing the work. This is one team’s framing rather than a consensus view, and it depends on investor psychology, which can shift quickly.
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This won’t help:
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BofA argues that enthusiasm for AI is now doing the job the “Fed put” once did, which makes a wobble in that confidence, more than higher yields, the risk to watch. Info via Dow Jones / Market Watch.
Summary:
- BofA Global Research strategists say the main risk to US stocks is a possible loss of confidence in AI, which they call the “AI put”, rather than higher bond yields.
- They say fear of missing out on AI is driving aggressive dip-buying and crowding out attention to macro risks.
- They compare it to the “Fed put”, with AI enthusiasm now acting as a cushion while the Fed embarks on another round of rate hikes.
- The 20 best-performing S&P 500 stocks have added about $1.7 trillion in market value since August 31, while the other 480 have lost about $1.9 trillion.
- Small and midcap stocks, financials and utilities have come under pressure as yields rose to multi-decade highs.
- BofA says higher Treasury yields would eventually weigh on stocks, but probably at a higher level than most expect.
BofA Global Research strategists say the biggest risk to US equities is not rising bond yields but a possible loss of investor confidence in artificial intelligence, a dynamic they call the “AI put”. In a report, the BofA team argued that fear of missing out on AI is dominating investor attention and driving aggressive buying of dips, leaving macro risks struggling to compete for notice.
The term borrows from the “Fed put”, the market belief that central banks will step in to support prices when markets struggle. BofA’s argument is that, as the Fed embarks on another round of rate hikes, enthusiasm for AI is performing a similar cushioning role for stocks. The bull market reaches its fourth anniversary in October, and the strategists see its fate as resting largely on whether that enthusiasm holds.
Recent market action fits that picture. As bond yields climbed to their highest levels in decades, a previously broad rally narrowed sharply. Small and midcap stocks, which tend to be more sensitive to interest rates, turned lower, while financials and utilities also came under pressure. The Dow Jones Industrial Average, which has less exposure to AI than the S&P 500 or the Nasdaq composite, has struggled too. Gains in AI-linked shares masked much of that weakness. A market data analysis shows the 20 best-performing S&P 500 stocks, mostly technology and industrial names, have added about $1.7 trillion in market value since August 31, while the other 480 have lost about $1.9 trillion. The S&P 500 was on course to finish September roughly flat.
The strategists noted a key difference from the original. The Fed put rests on the decisions of one institution, whereas the AI put depends on the confidence of millions of investors, which is harder to gauge. A central question is where the return on all the AI spending will come from. Analysts at Goldman Sachs and elsewhere estimate that more than $1 trillion has gone into data centre build-outs since late 2022. One economist pointed out that analysts covering technology expect cash flows to surge by 2028, while those covering the sectors that would pay for AI services are far more cautious, suggesting forecasts across sectors are out of step.
BofA acknowledged there is a level at which higher Treasury yields would start to weigh on stocks, but said it is probably higher than most investors expect. If confidence in AI were to falter, it warned, that could collide with an uncertain macro backdrop and magnify losses across markets.
This article was written by Eamonn Sheridan at investinglive.com.