AI "arms race" dragging down cash flow, Bank of America suggests shorting tech giants' bonds rather than stocks.

Bank of America Securities released a research report stating that investors should consider shorting the bonds of mega-cap technology companies, but should refrain from aggressively shorting overall artificial intelligence (AI) related trades. Strategist Michael Hartnett wrote in the report that for mega-cap technology companies such as Amazon.com, Inc. (AMZN.US), Alphabet Inc. Class C (GOOGL.US), Meta (META.US), Microsoft Corporation (MSFT.US), and Oracle Corporation (ORCL.US), their cash flows are no longer sufficient to support the current "AI capital expenditure arms race." He pointed out that these companies have issued over $120 billion in bonds in the past seven weeks, with even the "AI giants" hinting at the need for government support to lower financing costs. Hartnett said that the credit spreads of mega-cap technology companies have widened from 50 basis points in September to nearly 80 basis points, indicating that the low point has been established. He added that in the 12 months leading up to the peak of the internet bubble in March 2000, the prices of U.S. technology company bonds fell by 8%. Regarding market prosperity and bubbles, Hartnett said they "always end with 'caution' and 'exit' signals." As for the AI field, he said that the market has shown numerous "caution" signals, including a surge in the concentration of market value among tech giants (AI-related mega-cap stocks now account for over 40% of total market value), a narrowing breadth of the market, emerging valuation bubbles (leading AI stocks have a P/E ratio of around 45 times), and a large inflow of global funds and retail investors (against the backdrop of record inflows into technology funds, the stock prices of Japan's Advantest and South Korea's SK Hynix have doubled in the past two months). However, Hartnett added that true "exit" signals often come from rising interest ratesand currently, "the Federal Reserve has not raised rates, and yields have not surged significantly."