BofA Securities Commentary on AI‑Related Stock Sell‑off
BofA Securities indicated that the recent sell‑off in Japan’s AI‑related equities is a sign of a healthy rotation in equity markets rather than the onset of a broader market downturn. The brokerage highlighted several concerns weighing on sentiment: doubts about the sustainability of AI‑driven data‑center spending, rising costs for memory and AI tokens, and a shift toward cheaper Chinese open‑source AI models.
The firm noted that falling crude‑oil prices and higher U.S. real interest rates have prompted investors to rotate out of high‑beta, high‑valuation AI stocks into other sectors, even though benchmark indexes have masked the magnitude of these underlying shifts. BofA identified the biggest market risk as a sustained spike in oil prices that could force the Federal Reserve to maintain a hawkish stance, pushing real rates higher and triggering a deeper sell‑off in richly valued AI stocks. The bank judged this scenario unlikely for now, adding that rising gasoline prices would create political challenges for U.S. President Donald Trump ahead of the mid‑term elections.
Weakness in AI shares is also attributed to crowded positioning, with high‑beta and high‑valuation names reversing after an extended rally. BofA cautioned that only an extreme rise in market concentration comparable to the dot‑com bubble or the 2008 financial crisis would signal a more serious breakdown.
Seasonal factors have contributed to the rotation, as momentum stocks typically weaken between late June and early August when earnings‑revision momentum fades. While AI‑related stocks could rebound following first‑quarter earnings, the brokerage expects any recovery to be gradual rather than immediate.
BofA recommends that investors continue to hold AI‑related names but avoid stocks with excessively stretched price‑to‑earnings multiples. It advises increasing allocations to stable‑growth, non‑AI sectors such as banks, defense, construction, real estate, retail and food, which could benefit from improving market breadth and lower oil prices.