Bank of America's Hartnett: "AI Revolutionizing Trading" Accelerates Spread, Once a Tech Giant Cuts Costs, it will Trigger a Stock Market "Rotation Tsunami"

When the capital expenditure of AI giants changes from a "printing press" to a "shredder," a dramatic change regarding liquidity and asset pricing may be brewing. Nine months before the American midterm elections, on February 15th, in the latest "Flow Show" report released by Bank of America's top analyst Michael Hartnett, he raised his market warning to a new level. Compared to the "caution" three days ago, Hartnett's views this time are sharper and more specific. He pointed out that with the further increase in AI capital expenditure expectations, "AI disruption trade" is spreading at an astonishing speed from the tech sector to traditional service industries. For investors, the real turning point signal may depend on one action: when will tech giants "capitulate" and cut spending. $740 billion: From "printing" to "shredding" The most impactful incremental information in Hartnett's report this time is the repricing of AI capital expenditure. Three days ago, the market was still digesting a $670 billion expenditure expectation, but this time Hartnett pointed out that the capital expenditure expectation for hyper-scale cloud providers in 2026 has surged to $740 billion. This astronomical number is not only astonishing but also dangerous. This frenzy of investment will have extreme financial consequences: "This may push the free cash flow of Mag 7 to zero, or even negative." To maintain this scale of capital expenditure, tech giants may be forced to embark on a massive wave of bond issuance. This means that tech growth stocks, which once had perfect balance sheets, are now fully "securitized." Hartnett believes that the current market narrative is accelerating from "AI awe" to "AI poor." In this context, Hartnett has given a very clear trading signal: "The most obvious catalyst to overturn this situation would be for a hyper-scale AI provider to announce a cut in capital expenditure." Once this happens, it will directly trigger a dramatic rotation from tech giants to "Main Street" assets. "Wildfire" AI disruption spreading If you thought the impact of AI was limited to tech stocks, you were wrong. The latest research report shows that the disruptive effects are spreading madly to traditional service industries. Hartnett calls this phenomenon "wildfire AI disruption." He listed the spread of AI disruption by time: "Monday insurance brokers collapsed, Tuesday wealth advisors, Wednesday real estate services, Thursday logistics..." It is worth noting that the first sector to be disrupted by AIthe Indian tech stocks in the first quarter of 2025 (such as Infosys, TCS)have still not seen any buying support. This means that once identified as "AI victims" by the market, their stock price recovery will be a long time coming. Political countdown: February 24th Hartnett once again warns that political factors are intensifying this rotation. Hartnett pointed out that Trump's support on Wall Street has reached a historic new high, but his support on Main Street (ordinary people) is at a record low (dissatisfaction with inflation is as high as 36.4%). Hartnett specifically pointed out that the State of the Union address on February 24th will be a key point. "If there is no so-called 'Trump bump' by then, it is expected that the government will turn to more aggressive 'affordability' policies to win the midterm elections." To appease voters anxious about AI, these policies may include lowering energy, healthcare, and housing costs, and may involve distributing money by controlling the yield curve (YCC), which would further benefit small-cap stocks rather than high-flying tech giants. In terms of holdings and performance, Hartnett believes that the strategy of "being bullish on Main Street and bearish on Wall Street" is working. Since the rate cut on October 29th, asset performance has been extremely polarized: Winners (inflation/Main Street assets): Silver (+56%), South Korea's KOSPI (+34%), Brazil's Bovespa (+30%), Energy (+20%). Losers (bubbles/Wall Street assets): Mag 7 (-8%), Cryptocurrencies (-41%), Software sector (-30%). Yen: From safe haven to "long bull" signal In terms of asset prices, Hartnett has identified a historic signal change. The correlation between the yen and the Nikkei index has turned positive for the first time since 2005. In simple terms, when the yen rises, the Japanese stock market also rises. Hartnett believes: "There is nothing that shows a 'long bull market' more than both exchange rates and stock prices rising at the same time." This phenomenon has occurred in Japan in 1982-1990, in Germany in 1985-1995, and in China in 2000-2008. Although this is a long-term positive for the Japanese stock market, the short-term strength of the yen has exacerbated the pain of unwinding positions in cryptocurrencies, silver, and software stocks. Hartnett specifically warned about the "red line" of exchange rates: "Japan cannot tolerate an uncontrolled surge in the yen (i.e., the yen-dollar exchange rate falling below 145). This will crush Japanese exporters, hit global liquidity, and historically coincides with global deleveraging." Fund flows: Sell signals still flashing Despite $463 billion flowing into global stock markets this week, it looks like everyone is still buying: Stocks inflows $463 billion Bond inflows $254 billion Cash inflows $145 billion Gold inflows $34 billion ("no panic selling") Cryptocurrency inflows $1 billion, and Bitcoin has experienced a drop of about 50% since its historical high in October last year, along with leveraged liquidations, and the "selling pressure has also ended." But Bank of America's Bull & Bear Indicator reading has slightly fallen from 9.6 to 9.4 since the last time, still in the "sell" range. At the same time, Hartnett has reminded that the "sell signal" for risk assets (since December 17th) is still in effect. Hartnett maintains that the adjustment for risk assets is not over yet. The signal for this adjustment, which started in December, will only be lifted when people start panicking to hoard cash, reduce their tech stock positions, and the indicator drops to around 8. Cash allocation rising significantly from a historically low 3.2% to 3.8% or higher; Bonds rebounding from a net underweight of 35% to a net underweight of 25% or less; Tech stocks dropping from a net overweight of 17% to neutral; Consumer staples rebounding from a net underweight of 30% to a net underweight of 10% or less. 50-year "Great Rotation" review: Major events ignite, leadership assets change, the next baton points to emerging markets and small-cap stocks Hartnett explains the current situation with the "Great Rotation of the Past 50 Years": significant political, geopolitical, and financial events often change the leadership of assets-- End of the Bretton Woods system in 1971: New leaders were gold and physical assets (up 417% from 1971 to 1980), while laggards were bonds and financial assets (only 67%). Impact of the Reagan/Thatcher/Volcker era in 1980: Inflation peaked (14.8% in March 1980), the 10-year U.S. Treasury yield fell from 16% to 6% by 1985, and bonds became the leaders. Fall of the Berlin Wall in 1989, globalization, and deflation: U.S. stocks hit a 75-year low in global assets, commodities lagged in the 1990s, with copper being the only asset with a negative annualized return in the 1990s. 9/11 and China's accession to the WTO in 2001: Lagging assets were the dollar and tech stocks, while leaders shifted to emerging markets, commodities, and resource finance sectors. QE and buybacks after the 2009 financial crisis: U.S. stocks once again became the leaders, with private equity and growth rising (the tech/telecom/healthcare sector in the ACWI increased from 24% in 2008 to 44% in 2020; the financial/energy/materials sector decreased from 44% to 20%). COVID-19 in 2020 and monetary fiscal expansion: U.S. government spending increased by 56%, with nominal GDP growth >50%; leaders include the "big seven", while laggards include bonds (U.S. 30-year Treasury bonds down 50% from 2020-2023). Looking forward, Hartnett predicts that the next structural leaders will be emerging markets and small-cap stocks. He provides the following support: From U.S. large-cap growth to small-cap value: The shift from services to manufacturing, from light assets to heavy assets, and the rising cost of AI arms races; he also points out that hyperscalers have issued $170 billion in bonds in the past 5 months, significantly higher than the pace of about $300 billion per year from 2020 to 2024, and upward pressure on interest rate differentials has begun to build. From the U.S. to emerging markets: He describes the global rebalancing as "Shanghai New World Order = Shanghai New World Bull Market," mentioning new "Anything But Dollar (ABD)" trades; he also emphasizes that asset allocation to China and India is still very low, despite the two countries being two of the four largest economies globally; and he notes that BANK OF CHINA stocks have quietly risen to an 8-year high.