The global asset allocation is entering a "de-crowding" moment! Bank of America is shifting from AI computing power to value, biotechnology, and commodities in search of "non-consensus alpha."

A strategist team from Wall Street financial giant Bank of America Corp is urging investors to move away from the overly crowded theme of AI computing power trading. The institution believes that as the AI theme faces a de-leveraging storm and forced liquidations due to extremely crowded positions, and with inflation risks challenging traditional portfolios, sectors such as value stocks, biotechnology, regional banks, certain credit varieties, and commodities offer attractive investment opportunities. Bank of America's latest investment layout highlights a shift in focus towards high cash flow, compounding assets, moving from the historically extreme leverage levels of AI computing themes and the extremely high Beta momentum trading towards "high-quality cash flow compounding + valuation misaligned alpha." In a recent major research report, the Bank of America Corp strategist team stated that, in addition to the aforementioned attractive investment themes, international small-cap value stocks have become more appealing compared to U.S. large-cap growth stocks, while Japanese corporate profitability has reached record levels. The institution also views publicly listed private equity management companies as a contrarian investment opportunity and shows a preference for high-quality high-yield bonds rather than investment-grade bonds. For investors, this report clearly points to the need for a broader asset diversification strategy after years of U.S. tech stocks dominating global equity markets. Bank of America Corp believes there are significant investment opportunities in fundamentally strong cyclical companies and tangible assets, while questioning whether the record scale of AI investments has generated enough strong economic benefits to justify their high costs. Meanwhile, the institution remains bullish on the S&P 500 index from a technical perspective. Bank of America Corp is not bearish on the AI theme but emphasizes a very clear asset allocation upgrade: from highly concentrated AI/U.S. large-cap growth stock trading to "maintaining structural long positions in AI + increasing low correlation, high cash flow, low valuation assets" in the investment portfolio. As AI transitions from a scarcity narrative to the trillion-dollar capital expenditure realization phase, the determinants of excess returns will shift from "whether there is AI exposure" to "whether valuations, free cash flows, ROIC, and crowdedness align." Therefore, as the AI bull market enters the "high valuation + high crowding + high capital consumption" stage, Bank of America advocates reallocating marginal funds from the most expensive AI computing Beta to "cheaper earnings growth, real cash flows, and inflation-resistant assets" a rebalancing from a singular tech narrative to a broader market spread of profitability and high-quality cash flow sectors, rather than the end of the AI bull market. Massive AI expenditure has yet to bring about productivity prosperity. In the S&P 500 index constituents, excluding the financial sector, the ratio of capital expenditure to sales has reached a new historical record, but according to Bank of America Corp's research report, productivity growth in the overall U.S. economy remains modest. U.S. productivity is currently growing at a rate of 2.2%, slightly above the 2% average since 1987. Bank of America Corp economists estimate that AI currently contributes only about 0.1 percentage points to productivity growth annually, due to a slow adoption speed, skill shortages, and organizational barriers limiting its impact. This sharply contrasts with the internet boom period from 1996 to 2004, when tech investments were accompanied by a much more pronounced acceleration in productivity growth. Bank of America Corp strategists acknowledge that AI is enhancing economic output efficiency in areas such as software development. However, the bank warns that, in the long run, the largest incremental gains may ultimately flow to consumers and the global economy at large, rather than to the tech companies supporting large-scale AI computing infrastructure. In the latest fund manager survey conducted by the bank, semiconductors remain the most crowded trade, with semiconductor exchange-traded funds (ETFs) attracting about $17 billion in inflows in July. Biotech, bank stocks, and value stocks offer alternative choices. Bank of America Corp's strategists point out that biotechnology, insurance, regional banks, and revenue-weighted small-cap stocks are key investment directions that are less dependent on the AI boom and related volatility expectations. The report states that since June, these sectors have seen returns of around 10% or more. Bank of America Corp recommends shifting funds in the fourth quarter to cyclical value companies with strong profitability, particularly those closely linked to parts of the economy that can generate substantial cash flow. International small-cap value stocks have also shown impressive performance. Over the past five years, these assets have accumulated a return of 98%, compared to a 85% increase for U.S. large-cap growth stocks over the same period. International small-cap value stocks currently have a forward P/E ratio of about 12 times, while U.S. large-cap growth stocks stand at around 30 times, and their exposure to the tech sector is only about 6%. This year, U.S. value stocks have outperformed growth stocks by a full 10 percentage points, marking the strongest relative performance since 2022. Japanese reforms boost corporate return rates. Japanese companies' return on equity (ROE) has risen to a record 12%. Bank of America Corp believes this is partly due to corporate governance reforms and other policies aimed at promoting economic growth. This improvement occurs against the backdrop of global manufacturing indicators remaining flat, indicating that the driving force is not merely cyclical rebound. Over the past year, Japan's benchmark blue-chip stock valuation has surged nearly 40%. Bank of America Corp strategists unanimously state that expansionary fiscal policies, corporate reforms, and measures to support the yen could further encourage investment scale in the domestic Japanese market. Publicly listed private equity management companies as a contrarian trading opportunity. Bank of America Corp states that publicly listed alternative asset management companies may offer one of the most attractive recovery trading opportunities in the market. As the financial environment improves and software stocks recover, publicly listed private equity management companies' stock prices have risen 17% in about a month. The bank lists Ares Management (ARES.US), KKR (KKR.US), and Blue Owl Capital (OWL.US) as its preferred publicly traded private equity stocks, noting that these three companies are still 25% to 35% below their historical highs. Associated risks include potential AI disruption, high valuations from the previous market boom cycle, and investors' reluctance to reinvest capital. However, signs of recovery have started to emerge. Initial public offering (IPO) volumes grew fourfold from the first to the second quarter, possibly making it easier for private equity firms to exit investments and return cash to clients. Bank of America Corp also anticipates a significant decline in redemption requests for private credit funds in the third quarter after peaking earlier this year. The S&P 500 bull market trajectory and upward trend remain intact. The bank's technical strategists unanimously state that the S&P 500 index has broken out of a trading range that has persisted for several months, supporting a year-end bullish target of 8,000 to 8,540 points, indicating a potential upside of about 3% to 10% from the index level at the time of this research report's examination. This bullish outlook is built on the index's ability to hold above 7,504 points. A drop below this support level would signal a need for heightened vigilance. Seasonal fluctuations remain a significant risk factor. Since 1928, the S&P 500 index has recorded gains only 55% of the time from August to October. Historical calculations show that in August of a U.S. president's second year in office, the S&P 500 index averages a decline of 0.46%. Greater preference for high-quality junk bonds. In the fixed income market, Bank of America Corp favors BB-rated high-yield bonds and so-called "fallen angel bonds," which are bonds downgraded from investment grade to high yield. Over the past 40 years, these securities have generated some of the best risk-adjusted returns in the corporate bond market. Bank of America Corp strategists state that BB-rated bonds of different maturities have an average annual return of about 8%. In contrast, low-credit-quality CCC-rated bonds, despite appearing to have high yields, often see those yields offset by default losses. Bank of America Corp expects the total return on high-yield bonds to reach an optimistic historical return of 6% over the next 12 months. The bank also warns that major bond indices may expose investors excessively to inflation and interest rate risks. For example, the Bloomberg U.S. Aggregate Bond Index allocates about 88% of its assets to securities rated A or above while excluding or underweighting emerging market bonds, loans, and other higher-yield categories. Commodities may offer greater diversification value than bonds. The traditional 60% equity + 40% bond portfolio has achieved an 8% return so far this year, but according to this report, its inflation-adjusted annualized return has been nearly zero since 2022. Meanwhile, the correlation between bonds and stocks has been increasing. Over the past four years, the monthly correlation coefficient between the U.S. Aggregate Bond Index and the S&P 500 index reached 0.58, diminishing the effectiveness of bonds as a hedging tool. As a result, Bank of America Corp has turned its attention to commodities and other tangible assets. Since 1945, a hypothetical 60% equity + 40% commodities portfolio has achieved an average annual return of 10.8%, compared to a 9.2% average annual return for a portfolio of 60% equity + 40% U.S. Treasury bonds. Over the past five years, the correlation coefficient between commodities and stocks has been -0.12, while that of bonds and stocks has been +0.20. This historical performance supports the views of the institution's investment committee experts: in an era of sustained inflation, supply shocks, and geopolitical instability associated with GEO Group Inc, commodity types such as gold, silver, and copper may offer more effective protection than bonds. Searching for the next round of excess returns non-consensus alpha. Bank of America strategists believe that although AI capital expenditures have reached unprecedented levels, U.S. productivity growth remains at only about 2.2%, with estimates suggesting that AI currently contributes only about 0.1 percentage points to annual productivity growth; meanwhile, global semiconductors have become the most crowded trade, with a record 82% of respondents in July's BofA fund manager survey listing it as the most crowded long. Therefore, Bank of America Corp is not bearish on the AI theme but emphasizes a very clear asset allocation upgrade: from highly concentrated AI/U.S. large-cap growth stock trading to "maintaining structural long positions in AI + increasing low correlation, high cash flow, low valuation assets" in the investment portfolio. The strongest fundamentals behind this rotation are "expansion of profit breadth + compression of valuation differentials + excessively high AI crowding premiums." AI infrastructure still enjoys strong orders and profit growth, but Bank of America Corp's strategist team notes that hyperscale cloud vendors have invested about $234 billion in capital expenditures this year, leading to market concerns about significant cash flow shifting from hyperscalers to the AI computing infrastructure-related supply chain, and whether the ultimate investment returns can match capital costs. Meanwhile, sectors such as healthcare have begun to see real capital and profit inflection points: the S&P 500 healthcare index rose 11.2% over the past three months, outperforming the broader U.S. market by about 5 percentage points. In July, U.S. healthcare funds attracted a net inflow of $2.44 billion, and Bank of America fund managers net overweight ratio for the healthcare sector surged from 14% in June to 32%; the market expects this sector to re-enter double-digit profit growth from the fourth quarter of 2026 to 2027. In the view of Bank of America Corp strategists, assets such as biotechnology, regional banks, insurance, international small-cap value stocks, and Japanese reform beneficiaries share common characteristics: they are not merely defensive assets but are undervalued, improving financially, and have lower correlation with the AI CapEx cycle making them a source of non-correlated and asymmetric alpha investment returns outside of the crowded AI trades. The so-called "alpha" is defined as returns on actual investments that far exceed "beta returns," referring to returns that significantly surpass those realized from investments tracking benchmark indices. Returns achieved by tracking benchmark indices are also known as "beta returns." On the cross-asset alpha level, Bank of America Corp strategists say that the optimal portfolio in the coming years may no longer be the traditional "60/40," but rather a new-style barbell closer to "growth tech + cash flow value + tangible assets + high-quality credit." Sustained inflation, fiscal deficits, and energy and supply chain shocks are weakening the ability of long-term Treasuries to serve as natural hedges against stocks, and the rising frequency of simultaneous declines in stocks and bonds over the past few years has prompted institutions to seek alternative diversification tools such as commodities, infrastructure, and inflation-protected assets. Meanwhile, the enormous financing demands of AI companies and governments are pushing long-term real interest rates higher, further raising the price of capital scarcity.