Bank of America strategists, led by Michael Hartnett, identified a capital expenditure reduction by an AI hyperscaler as the most obvious catalyst that could materially reverse the current market rotation from what they call "AI-awe" to "AI-poor." In a note outlining the implications of broad AI adoption, the strategists argued that such a capex cut would represent a clear signal of retrenchment by the companies most associated with driving the AI investment cycle.
The strategists described a "wildfire AI disruption" spreading through multiple service industries. They specifically cited insurance brokers, wealth advisors, real estate services and logistics as areas already experiencing disruption, and pointed to India technology stocks as the first sector to be hit by AI-related effects in the first quarter, where they say there is "no bid yet."
Beyond the immediate AI dynamics, the Bank of America team emphasized that major portfolio rotations are already under way. One technical shift they flag is the correlation between Japan's yen and the TOPIX turning positive for the first time since 2005 - a change the strategists say has historically coincided with secular bull markets.
Concurrently, the firm reiterated a broader structural rotation away from U.S. large-cap growth names toward small-cap value stocks, and from U.S. equities into emerging markets. Under what the strategists call "The Great Rotations," they expect emerging markets and small caps to be the likely secular leaders as U.S. exceptionalism eases and global rebalancing encourages trades that are "anything but dollar."
Positioning in markets remains stretched, according to Bank of America. Their Bull & Bear Indicator fell to 9.4 from 9.6, preserving a contrarian "sell signal." The strategists also pointed to January's Global Fund Manager Survey, which they describe as the most bullish reading since July 2021. They said that only a meaningful rise in cash levels or systematic de-grossing in technology exposures would likely be sufficient to unwind what they call "excess bull" positioning.
Fund flow data through Feb. 11 showed continued investor appetite across asset classes. Equity funds attracted $46.3 billion in the week, while bond funds drew $25.4 billion. Cash allocations rose by $14.5 billion, gold saw inflows of $3.4 billion and crypto recorded a $100 million inflow.
Within regional and sector patterns, Korean equities posted a record four-week inflow totaling $14.3 billion. European equities experienced their largest two-week inflow since May at $6.9 billion, and U.S. small caps saw their biggest weekly inflow in eight weeks at $1.9 billion. Technology-focused funds registered their largest three-week inflow since November at $14.5 billion, and infrastructure funds recorded a record weekly inflow of $1.1 billion.
The strategists framed these developments as part of a broader, multi-front market rotation in which shifts in cash, positioning and capital spending by major AI investors could meaningfully alter the investment landscape.