BofA Warns AI Trade Nearing Exhaustion, Urges Selective Rotation as US Consumer Strength Undervalued

Bank of America strategists said the twin trades of buying AI capital-spending beneficiaries and selling white-collar consumer names are increasingly unlikely to generate excess returns, urging investors to rotate selectively. The call, led by Savita Subramanian in an Oct. 5 report, argues markets have already priced in both massive AI-related spending and weakening discretionary demand. Subramanian warned that underestimating the US consumer is dangerous, while capex strength is largely reflected in prices. Long-only active funds hold near-record underweights in AI-disrupted sectors including IT services, consumer finance and software, while industrials versus consumer discretionary sit near historic highs, BofA data show. Fund managers are most overweight electronic equipment, instruments and components. The S&P 500 consumer staples index rose 4.6% over the past 12 months, while the consumer discretionary index fell 3.3%, both trailing the benchmark. Lululemon and Nike each dropped roughly 50%. BofA said last week that strong spending and solid balance sheets have shifted market risk to the upside.