In a note to clients reviewed by Fortune, BofA strategists declared that “doubts around the AI revolution are emerging,” with the market narrative rapidly shifting from an “upside-only” perspective to serious concerns that AI is a “double-edged sword.” Chief among these new fears is the growing realization that AI might not universally boost corporate profits—it might actively destroy them.
BofA highlighted several large “downside risks” that are, frankly, bumming out the AI trade. Traders are confronting a world of cannibalization, capital expenditure cuts, and other various AI-related monsters.
BofA points out a glaring blind spot in current market expectations. The sell side consensus currently projects a staggering 17% compound annualized earnings per share (EPS) growth for global equities over the next five years. This lies at the heart of what strategists call the “cannibalization” paradox.
Corporate margins are already at all-time highs, BofA strategists noted, complicating this 17% forecast. Historically, double-digit compound EPS growth has only been achieved when margins were depressed. These “optimistic” expectations therefore assume that tech EPS growth from AI adoption will be sustainable and at the same time that this growth will not “cannibalize existing profit pools.” That is exactly where investors are showing “the largest rethink,” with sharp declines in AI-vulnerable sectors such as software, insurance, and wealth management, and a flight to safer sectors with reliance on physical assets (e.g., mining, utilities, and chemicals).
Beyond direct business cannibalization, BofA warned that the AI rollout poses severe macroeconomic risks. The U.S. labor market is already flashing warning signs, with three-month payroll growth hovering at an anemic 0.1%—a level of zero job growth historically associated with the end of past equity bull runs. This includes both 2000 and 2007, when bubbles bursting coincided with painful recessions.
BofA cautions that AI-related productivity gains could further depress corporate demand for labor, worsening this weakness. Ironically, massive job losses could backfire on the tech giants themselves, as the hyperscalers funding the AI boom rely heavily on consumer advertising revenues, which demand a healthy, employed consumer base. The implicit assumption from consensus market and earnings projections, analysts argue, is that weakness in the labor market is driven by temporary headwinds including the trade picture, the immigration crackdown, and over-hiring during the Great Resignation post-pandemic era, but what if those assumptions are wrong?
Furthermore, the debt-fueled AI investment spree is showing distinct signs of strain. For the first time in the history of BofA’s Global Fund Manager Survey, investors reported that they believe companies are overinvesting and should cut back on capital expenditures (capex). Corporate bond spreads for U.S. hyperscalers have hit a three-year high, and private credit platforms deeply exposed to software debt are buckling under the pressure, highlighted by Blue Owl suspending retail investor redemptions for one of its funds this week. BofA’s U.S. equity strategy team expects these headwinds to culminate in an “AI air pocket” later in 2026.
In response to this shifting landscape, BofA cautioned that AI infrastructure providers—such as semiconductors, capital goods, and construction materials—now look dangerously “stretched,” trading at all-time-high relative prices and peak earnings expectations. Declaring them highly vulnerable to AI capex disappointments, BofA has aggressively downgraded the semiconductor sector to an underweight rating.
Instead of chasing the AI rally, BofA advises investors to seek shelter in “AI hiding places.” The firm is maintaining overweight positions in defensive sectors with limited AI disruption risk, such as consumer staples, telecoms, and chemicals. Overall, the bank remains decidedly negative on European equities, projecting a 15% downside by the second quarter as the painful reality of a cannibalized, double-edged AI market fully sets in.
