This is "the most obvious catalyst ending the AI hype cycle": Bank of America's Hartnett

Investing.com - The strategists led by Michael Hartnett at Bank of America stated in a report that the artificial intelligence supercharger’s reduction of capital expenditures (capex) is the “most significant catalyst reversing the market rotation from ‘AI boom to AI scarcity’.”

These strategists pointed out that the “blazing AI disruption” is affecting sectors such as insurance brokers, wealth advisors, real estate services, and logistics. They noted that Indian technology was the first sector to be disrupted by AI in the first quarter, and currently “there is no buying interest.”

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From a broader perspective, Bank of America observed that a major rotation is underway. The correlation between the Japanese yen and the Tokyo Stock Exchange index has turned positive for the first time since 2005, and strategists say this dynamic has historically been associated with a long-term bull market.

At the same time, they reaffirm the structural rotation from US large-growth stocks to small-value stocks, and from US equities to emerging markets (EM).

Under this “big rotation,” strategists believe the next long-term leaders could be emerging markets and small caps, as US exceptionalism gives way to global rebalancing, and “any non-dollar” trades are gaining traction.

Market positioning remains excessive. Bank of America’s bull-bear indicator fell from 9.6 to 9.4, and its contrarian “sell signal” remains valid. Meanwhile, the bank noted that the January global fund manager survey showed the most optimistic sentiment since July 2021, and indicated that a significant increase in cash levels or deleveraging in tech stocks is needed to alleviate the “overly bullish” positioning.

Turning to recent fund flows, data from Bank of America shows that in the week ending February 11, equity funds attracted $46.3 billion, bond funds attracted $25.4 billion, cash $14.5 billion, gold $3.4 billion, and cryptocurrencies $100 million.

Notable movements include South Korean stocks recording a record four-week inflow of $14.3 billion, Europe stocks experiencing the largest two-week inflow since May at $6.9 billion, and US small caps seeing their largest eight-week inflow of $1.9 billion.

Technology funds saw their largest three-week inflow since November, with $14.5 billion, while infrastructure funds recorded a record inflow of $1.1 billion.

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