Investing.com -- Higher bond yields are now hurting the AI stock rally, Bank of America strategists led by Michael Hartnett say, as bond markets rein in a surge in hyperscaler spending.
Hyperscaler capex is forecast to jump from $240 billion in 2024 to $1.2 trillion in 2027, while free cash flow is forecast to slump from $240 billion to negative $180 billion over the same period. The strategists said policymakers won't allow a disorderly rise in yields, and that the threat of yield curve control or quantitative easing will cap them.
Still, risk assets and AI need yields to fall, with the release valve in the first half of 2027 likely to be geopolitical peace, a big drop in oil and an end to rate hikes, the team noted.
The tech stall is "classic painful tightening stuff but not mortal unless job losses/credit event," the strategists said. They pointed to 42 global central bank hikes in six months, a stronger dollar and higher Treasury yields over four months. The Nasdaq 100 is capped at 30,000, and the semiconductor index is down 20%.
The next big risk-on move awaits an end to hikes and a collapse in oil in the first half of 2027, the team said. They named two levels to hold before a year-end rally can start: $70 for the Roundhill Magnificent Seven ETF (NYSE:MAGS) and $520 for the VanEck Semiconductor ETF (NASDAQ:SMH).
In credit, the strategists urge investors to buy tech bond "diamonds in the rough." U.S. tech bonds are down 9% this year, and their return relative to investment-grade bonds is at a 30-year low.
Hyperscaler debt issuance surged to $182 billion in 2026 from $17 billion in 2024, and Magnificent Seven bond yields of 6% to 8% look attractive, BofA noted. The strategists also see META's equity issuance as a sign of new respect for credit investors. With $89 billion of hyperscaler equity issued this year, they said the era of big buybacks is over.
Asset allocators will stay "Anything But Bonds," strategists said, given populism, fiscal excess and nominal booms. The 2020s super trends have paid off unevenly, with annualized returns this decade of 17% for the Nasdaq and 15% for gold, against negative 4% for 10-year Treasuries and negative 5% for China stocks.
At the same time, BofA recommends shorting oil in the first half of 2027 as peace boosts supply. But if lower oil doesn't trigger a bounce in the euro and yen, the strategists said, that would be a big tell that China's deflation has become "a new global negative."
Commenting on the upcoming midterms, a Democratic sweep is getting priced in, but a Democratic wave and a jump in bond yields are not, the strategists said. Voters want "affordability," which is negative for tech, bank and energy monopolies in 2027 and positive for consumer discretionary.
In the latest flows, equity funds drew $56.2 billion in the week to Oct. 28, bonds $15.4 billion and money market funds $3.4 billion. Gold saw its first outflow since July at $1.7 billion, and crypto funds shed $500 million.
China equities took in $25.7 billion, the biggest inflow since April 2025, on "national team" buying. Japan drew $6.8 billion, the biggest since May 2013, while Europe lost $2.3 billion, the largest outflow since July.
Tech funds saw a fifth week of inflows at $5.3 billion, and materials had the biggest outflow since July at $1.2 billion.
U.S. equities saw a fourth week of inflows at $14.9 billion. EM equities drew $30.6 billion in a fifth week of inflows, and Japan saw a third week. Europe had a third week of outflows.
Investment-grade bonds saw a sixth week of inflows at $5 billion, and EM debt a 13th at $4 billion. Treasuries saw an 18th week of inflows at $1.2 billion, and TIPS a 39th at $1.1 billion, the biggest since June. High-yield bonds had their first inflow in five weeks at $1.8 billion.
The BofA Bull & Bear Indicator slipped to 7.1 from 7.2 on weaker breadth and wider spreads in high-yield and subordinated bank debt.
Original Article
Higher yields now hurting AI stock bull as bond markets police capex: BofA
European shares slip as Amazon, Intel stoke AI cash-burn fears
