Bank of America predicts a hit of up to 10% on European stocks due to risks in the AI cycle

Bank of America (BofA) has maintained a cautious stance on European stocks for months and, despite the strength of the indices, sees no reason to change its outlook. In its latest strategy report, the entity predicts that the Stoxx 600 will fall to 580 points by the second quarter of 2027, which would imply a nearly 10% adjustment from current prices.

BofA's insistence on its bearish view stems from a clear diagnosis: the market is ignoring the accumulation of risks. This is compounded by growing skepticism regarding the major catalyst for stocks over the past year: the massive spending cycle in artificial intelligence.

"We remain negative on European equities," reiterate strategists Sebastian Raedler and Thomas Pearce.

Markets: The market ignores risks while the AI cycle faces skepticism and margin pressure.

For BofA, it is paradoxical that the Stoxx 600 trades at less than 3% from its all-time highs amid growing doubts about the AI boom. Although strong earnings revisions have so far cushioned the rise in real bond yields, the bank warns that this shield will weaken if skepticism about the profitability of tech companies continues to escalate.

The Detail

One of BofA's central arguments is that different segments of financial markets have already begun to demand a higher risk premium, while this movement has barely translated to the stock markets.

Bank of America points out, for example, the rise in spreads of French sovereign debt, the significant increase in credit premiums for lower-quality U.S. debt, and the pressure on the most indebted companies linked to the AI ecosystem. However, equity risk premiums remain close to recent lows.

While stock markets have suffered a cut in their valuation multiples ---with the global P/E ratio falling from 20.5 to 17.5 times and the European from 15.8 to 13.8 times---, BofA warns that this decline is solely due to the rise in real bond yields. According to the firm, stocks have absorbed the impact of the cost of money, but have not yet incorporated the pending correction for greater market risk.

Bank of America: Predicts a 10% drop in European stocks due to risks from the AI cycle.

This is one of the main reasons why it maintains its caution: if this risk also translates to equities, there would be room for further declines even if multiples have already moderated.

The AI Boom at the Center of the Debate

The second major argument from Bank of America lies in the increasing fragility of the spectacular investment cycle in artificial intelligence. Projections for capital spending over the next twelve months from major U.S. hyperscalers ---Amazon, Alphabet, Meta, Microsoft, and Oracle--- skyrocketed from about $330 billion at the beginning of 2025 to $1 trillion, a figure that is approximately 3% of the U.S. GDP.

It is important to underline the magnitude of the transformation: it represents an investment intensity greater than that recorded in major historical cycles such as the 19th-century railroad boom or the tech bubble of the 1990s.

Although the rise of AI has boosted global GDP, corporate balances, and the stock market rally, Bank of America has raised alarms. The institution warns that the sector is entering a classic investment cycle dynamic: the initial extraordinary profits attracted a massive wave of capital that now threatens to lead to overcapacity, increased competition, and significant wear on profit margins.

Although the rise of AI has boosted global GDP, corporate balances, and the stock market rally, Bank of America has raised alarms.

The lesson from previous episodes, the bank argues, is that "what matters for the sustainability of large investment cycles is not the brilliance of the new technology, but the economics of the new industry." In other words, BofA does not question the transformative potential of AI; what it doubts is whether all the investments being made can generate sufficient returns to justify their impressive magnitude.

Warning Signs

At this point, the first warning signs emerge. The competition for AI dominance has heated up with the emergence of Chinese open-weight models that offer high capacity at very low cost. The logical consequence did not take long to arrive: the average price of tokens has plunged nearly 50% since mid-year, pressuring the margins of the entire industry.

The bullish argument holds that the drop in prices should spur the use of these tools to offset the lower unit cost. This is the application of the so-called Jevons Paradox: when a technology becomes cheaper, its consumption increases to such an extent that total spending ends up being higher. For now, Bank of America does not see sufficient evidence that this phenomenon is occurring.

Latent risks: Rising financing costs and difficulty in monetizing AI threaten investment profitability.
Image created with AI

The use of AI in US companies is skyrocketing, but revenue is declining. According to Ramp AI, although token consumption continues to grow, total spending has slightly decreased since August due to lower prices crushing margins. For analysts, this difficulty in monetizing amid fierce competition is the classic precursor to a weakening investment cycle.

This scenario is compounded by rising financing costs. Spending related to artificial intelligence increasingly depends on debt, in a context where bond yields have experienced a sharp increase. This is the chain of risks that worries Bank of America: a reduced ability to monetize AI, a deterioration in investment profitability, cuts in Capex, economic slowdown, downward revisions in corporate profits, and a consequent increase in stock risk premiums.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.