BofA's Hartnett: The Contradiction Between AI and ABB is Exploding, True Decompression for Tech Stocks May Have to Wait Until Next Year

Author: Bu Shuqing, Wall Street Insight

The surge in capital expenditures for AI hyperscalers is colliding with structural pressures in the bond market, putting pressure on the tech stock bull market. Bank of America Merrill Lynch's latest fund flow report indicates that this contradiction is unlikely to be resolved in the short term, and the true window for risk asset decompression may not come until the first half of 2027.

According to the "Flow Show" weekly report released by Bank of America Merrill Lynch's global investment strategy team on October 29, the debt issuance scale of AI hyperscaler cloud computing companies is expected to reach $182 billion by 2026, sharply up from $17 billion in 2024, leading to a bond supply shock that is suppressing tech debt performance— the total return of U.S. investment-grade tech debt relative to the overall investment-grade bond index has fallen to a 30-year low.

Meanwhile, central banks around the world have raised interest rates a total of 42 times in the past six months, the dollar has strengthened, U.S. Treasury yields have risen, and the momentum of tech stocks has been significantly hindered, with the Nasdaq 100 index hitting a ceiling of 30,000 points and the Philadelphia Semiconductor Index down 20% from its peak.

BofA strategist Michael Hartnett pointed out in the report that policymakers will not allow bond yields to rise uncontrollably, threatening stock market wealth and bank collateral. The threat of yield curve control (YCC) or quantitative easing (QE) will effectively suppress bond yields.

However, the true decompression of risk assets and AI stocks still relies on a decline in bond yields and easing financial conditions, and this "decompression valve" is most likely to be realized in the first half of 2027 through geopolitical peace progress, a significant drop in oil prices, and the end of the interest rate hike cycle. This week, global stock funds saw an inflow of $56.6 billion, with China's stock market seeing a weekly inflow of $25.7 billion, the largest since April 2025.

Surge in AI Capital Expenditures, Tech Debt Becomes "Neglected Lowland"

The capital expenditure expansion of AI hyperscalers is reshaping the bond market landscape.

According to BofA data, the free cash flow of related companies is expected to plummet from $240 billion in 2024 to negative $180 billion in 2027, while capital expenditures are projected to soar from $240 billion in 2024 to an estimated $1.2 trillion in 2027.

To fill this funding gap, hyperscale companies are issuing bonds on a large scale. The debt issuance scale has reached $182 billion in 2026, while the stock issuance scale during the same period is $89 billion, compared to only $17 billion in 2024 for debt issuance. The large-scale stock financing signifies the end of the era of large-scale stock buybacks— the buyback scale of hyperscale companies has plummeted from $105 billion in 2024 to an annualized approximately $14 billion in 2026.

BofA believes that this backdrop makes tech debt a "neglected lowland" (diamonds in the rough). The total return of U.S. investment-grade tech debt relative to the overall investment-grade bond index is at a 30-year low. In terms of specific yields, the long-term investment-grade bond yields of tech giants like META, Amazon, Google, and Nvidia generally range from 6% to 8%, with some high-yield bonds yielding as high as 9% to 14% (see Table 1). BofA recommends that investors pay attention to this relative value opportunity.

Structural Contradiction Between "ABB" and AI

BofA summarizes the asset allocation pattern of the 2020s into four super trends, including ABB (Anything but Bonds), ABD (Anything but Dollar), and AI (Artificial Intelligence).

Now, the inherent tension between ABB and AI is becoming increasingly prominent.

The report points out that from social unrest in Brazil and France to budget disputes in the UK, global voters are generally demanding that governments increase spending to address inequality. Governments are well aware that austerity policies face social risks, and political populism and polarization trends are difficult to reverse. This means that asset allocators will maintain a structurally low allocation to bonds and hold positions that steepen the yield curve.

However, it is precisely this "ABB" logic that is driving up bond yields, which is constraining the AI stock bull market— the bond market is acting as a "disciplinary enforcer" for the surge in capital expenditures of AI hyperscalers. BofA points out that although the policy-level threats of YCC/QE will effectively suppress the disorderly rise of bond yields, the true rebound of risk assets and AI stocks requires a substantial decline in bond yields and easing financial conditions, and the maturation of this condition is most likely dependent on: significant drops in oil prices brought about by geopolitical peace progress, and the end of the global interest rate hike cycle— BofA points to this window in the first half of 2027.

This Week's Fund Flows: China Hits New Highs in Over a Year, Gold Sees First Net Outflow

This week, global fund flows showed significant divergence. Stock funds saw a net inflow of $56.6 billion (including $75.9 billion inflow into ETFs and $19.6 billion outflow from active funds), bond funds had a net inflow of $15.4 billion, cash saw a net inflow of $3.4 billion, cryptocurrency had a net outflow of $500 million, and gold saw a net outflow of $1.7 billion.

Notable specific flows include: China's stock market saw a weekly inflow of $25.7 billion, the largest since April 2025; Japan's stock market saw an inflow of $6.8 billion, the largest single-week inflow since May 2013; European stock markets saw an outflow of $2.3 billion, the largest single-week outflow since July 2026; gold experienced its first net outflow since July 2026; TIPS saw an inflow of $1.1 billion, the largest scale since June 2026, indicating rising inflation expectations.

By sector, the tech sector recorded a net inflow for the fifth consecutive week ($5.3 billion), while the materials sector saw an outflow of $1.2 billion, the largest since July 2026. BofA's private client asset management scale reached $4.6 trillion, with a stock allocation ratio of 66%, bonds at 17.5%, and cash at 9.4%; over the past four weeks, private clients have continued to buy municipal bonds, industrial and healthcare ETFs, while selling consumer staples, emerging market debt, and discretionary consumer ETFs.

Bull-Bear Indicator Retreats, Election Risks Emerge

BofA's Bull & Bear Indicator retreated slightly from 7.2 to 7.1 this week, with the current signal being "neutral." The retreat in the indicator is mainly due to the weakening breadth of global stock indices, widening spreads in high-yield debt and subordinated bank debt, partially offset by strong stock fund inflows.

Regarding political risks, BofA points out that the risk of a Democratic sweep (DEM sweep) is being priced into the market, but the scenario of the Democrats winning 53 Senate seats and bond yields rising has not been fully priced in. Regardless of the election outcome, voters' demands for "affordability" negatively impact tech, banking, and energy monopolies, while being relatively favorable for the discretionary consumer sector.

In China, BofA notes that Chinese bond yields have hit new lows, the renminbi has appreciated over 20% against the New Taiwan Dollar in the past year, Chinese tech stocks (CQQQ) have fallen 32% since June, and deflation in China has become a global issue. BofA recommends shorting oil prices in the first half of 2027, arguing that peace progress will boost supply; however, if a drop in oil prices does not lead to a rebound in the euro and yen, it will signal that China's deflation has become an important new negative factor globally.

2026 Asset Returns: Commodities Lead, Bonds Lag

From the performance of cross-assets year-to-date, commodities rank first with a 91.6% increase, while crude oil (WTI) has risen 79% this year. U.S. stocks are up 14%, global stocks are up 9.6%, the dollar is up 3.9%, and cash returns are at 3.1%. High-yield debt has slightly decreased by 0.5%, investment-grade bonds are down 2.5%, government bonds are down 3.3%, gold is down 7.1%, and Bitcoin is down 8.4%.

Looking at the overall decade of the 2020s, BofA data shows that the annualized return on 10-year U.S. Treasuries is negative 4%, gold's annualized return is 15%, and the annualized return of the Nasdaq index is 17%, confirming the continued effectiveness of the four super trends of ABB, ABD, and AI.

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