Strategists at Bank of America believe that as the market has already fully priced in the investment thesis of continued growth in AI-related capital expenditure alongside pressure on discretionary consumer spending, it will likely become increasingly difficult for investors to earn excess returns by going long on AI capex beneficiaries and avoiding white-collar consumption-related stocks. The bank recommends that investors begin making selective adjustments, because the strong outlook for AI capital expenditure may already be largely reflected in asset prices, and the resilience of the American consumer should not be underestimated.

In a report released Monday, Bank of America strategists led by Savita Subramanian said that one of the core trades in the market this year has been the divergence between surging AI-related investment and contracting discretionary consumer spending. The latter is partly driven by white-collar job losses, but this trend is now fully reflected in investor positioning.

AI Capex Trade Becoming Crowded as Bank of America Urges Selective Adjustments

Subramanian said that in the future, generating excess returns by buying AI capital expenditure beneficiaries and selling white-collar consumption-related stocks may require much greater effort. She noted that now is the time for selective adjustments, because there is risk in underestimating the willingness of American consumers to spend, while the theme of strong capital expenditure may already be largely priced in by the market.

Bank of America's analysis of long-only active funds shows that positioning in what the bank calls "AI-disrupted industries" — including information technology services, consumer finance, and software sectors — has already fallen close to historic lows. At the same time, fund allocations to industrial stocks relative to the consumer discretionary sector have reached near historic highs. Looking at sub-sectors, fund managers are most overweight in the electronic equipment, instruments, and components industry.

This means that the market's bet on "AI capital expenditure over consumption" has already become quite concentrated. If the related trade becomes even more crowded, the incremental excess return it generates for investors could narrow, even if AI investment continues to remain strong.

Bank of America said last week that with U.S. consumer spending remaining strong and household balance sheets in healthy condition, the distribution of market risks has shifted to the upside, and investors could consider adopting a more aggressive stance.

White-Collar Employment Under Pressure as Consumption Shifts from "Want" to "Need"

However, Bank of America does not believe that pressures in the consumer sector have completely disappeared. As more high-paying positions in AI-disrupted industries come under threat, Subramanian expects that white-collar professionals will continue to downgrade their spending, meaning expenditure will shift further from "wanted goods" toward "necessities."

This trend is already reflected in the relative positioning of consumer staples and consumer discretionary sectors. Over the past 12 months, both consumer sectors have underperformed the S&P 500, but their internal performance has diverged significantly. The S&P 500 Consumer Staples Index rose 4.6% over the same period, while the Consumer Discretionary Index fell 3.3%.

Some discretionary consumer companies are under particularly notable pressure. For example, athletic apparel companies Lululemon Athletica Inc (NASDAQ: LULU) and Nike Inc (NYSE: NKE) have both seen their share prices fall by approximately 50% cumulatively over the past year.

In Bank of America's view, this positioning structure remains reasonable for now. The bank had previously identified the shift of economic growth momentum from consumption to capital expenditure as one of its core investment themes for this year.

"Capex Over Consumption" Still Holds, but Earning Excess Returns Is Getting Harder

In its annual outlook published last November, Bank of America strategists explicitly put forward the view of "capital expenditure over consumption" and expected that AI-related spending would continue to be an important force supporting capital expenditure. Therefore, Bank of America is not completely overturning its previous investment thesis this time, but rather believes that as this view gradually becomes a market consensus, the related opportunities have become increasingly fully reflected in investor positioning and asset prices.

In other words, AI capital expenditure may still remain strong, and white-collar employment and some discretionary consumer areas may still face pressure, but simply relying on going long on AI investment beneficiary sectors and avoiding consumer sectors may no longer generate significant excess returns as easily as before.

As positioning in AI-related assets becomes increasingly crowded, U.S. consumer spending and household balance sheets continue to demonstrate resilience, which has prompted Bank of America to recommend that investors begin selectively seeking opportunities that have been previously overlooked, rather than continuing to simply chase the AI capital expenditure trade that has already become the market mainstream.