Investing.com -- Markets are becoming increasingly unwilling to fund the buildout of AI infrastructure, Bank of America argues, flagging a sharp rotation in European equities and warning of further downside for stocks.
"Since early October, there have been increasing signs that markets are becoming less willing to fund the AI infrastructure build-out," BofA analysts said, pointing to AI data center developer Firmus withdrawing its planned initial public offering (IPO) due to weak demand.
CoreWeave, the largest neocloud, saw yields on its 2032 unsecured bonds touch 15%, while its shares fell around 15% the following day amid its reported ambition to tap "unlimited" insurance-company capital. South Korean neocloud Elice fell more than 30% below its IPO price on debut, though it has since recovered some of that decline.
European AI capex beneficiaries have felt the impact, with the MSCI Europe AI Capex Select index down around 15% from its early October high, reversing all of its gains since the late-July low. BofA described the move as "the sharpest cyclical/defensive rotation since Covid." The 12-month rolling correlation between the AI capex index and European cyclicals versus defensives has risen above 90%, from around 25% a year ago.
European cyclicals have underperformed defensives by 11% since the start of the month, the worst stretch since the Covid shock in March 2020. Semiconductors have been the worst performer, down 15% on a relative basis, followed by mining and capital goods, while "anti-AI" sectors — food and beverages, and personal and household goods — have outperformed.
BofA said it remains concerned about the AI capex outlook, citing both rising funding costs that squeeze incremental returns and the risk of disappointing monetization as competitive pressure erodes pricing power, a pattern the bank said has followed prior large-scale capex cycles.
It also said the data suggests overall AI spending by U.S. businesses has flatlined in recent months even as declining token prices have driven rising token volumes, a dynamic the analysts linked to the Jevons paradox, in which falling prices lead to higher total spending through increased adoption.
BofA stays negative on European equities overall, projecting nearly 10% further downside for the STOXX 600 by the second quarter of next year, following the index’s 4% pullback from its early-August record high. It remains underweight semiconductors, capital goods and mining, and overweight the "anti-AI" staples sectors, while staying underweight cyclicals versus defensives more broadly.
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