Rebalancing the AI trade

AI spending. AI bubble. AI arms race. We hear about the AI trade every day, but here’s what the pros are actually saying about it.

Bank of America’s latest global fund manager survey struck a mixed tone. While sentiment on earnings is the strongest it’s been in nearly four years, cracks are starting to show:

• 35% of managers say companies are overspending on capital expenditure, the highest reading in more than two decades
• 25% flagged an AI-driven asset bubble as the biggest potential tail risk
• 30% see heavy AI spending by mega-cap tech as a possible trigger for future credit stress

With those worries in mind, BofA says pro investors are trimming positions in tech and cutting exposure to the US dollar, while adding to energy, materials, and defensive consumer names.

The rotation goes global

The shift isn’t just sectoral—it’s geographic.

With US equities trading at roughly a 40% premium to global peers, investors are increasingly looking overseas. Flows into European and emerging markets are now at their strongest levels since early 2021.

In Europe, the appeal is largely valuation-driven. Robert Lancastle of boutique fund manager J O Hambro notes that much of the S&P 500 outside the mega-cap tech cohort offers no clear growth edge over European firms, yet still commands materially higher earnings multiples. Meanwhile, Europe’s economic backdrop is beginning to show incremental improvement.

Discovery Capital Management founder Rob Citrone says emerging markets offer a different edge: many firms in those countries are monopolies or oligopolies with pricing power and limited competition, meaning they don’t have to splurge on AI to stay ahead.

Asia is seeing particularly strong demand. Hedge funds recorded their largest net purchases of Asian equities in nearly a decade last week, according to Goldman Sachs data, with enthusiasm centered on companies tied to AI infrastructure.

So… how big is the tab?

Together, Alphabet, Microsoft, Meta, and Amazon are on track to pour nearly $700 billion into AI infrastructure this year, a more than 60% jump from the already record-setting levels seen in 2025.

As investors get jittery about AI spending and the tech selloff continues, Amazon stands out: Analysts project negative free cash flow anywhere from $17 billion to $28 billion in 2026 due to its massive capex plans. Maybe it’s no coincidence that the stock just logged its worst slide since 2006, shedding $450 billion in market value through nine straight days of losses.

For now, the buildout continues. But as the bill gets bigger, investors may want to shop around.—SY