The "easy win" era of AI capital expenditure trades may be ending; Bank of America suggests investors shift to the consumer sector.

According to Zhitong Finance APP, strategists at Bank of America believe that as the market has already heavily bet on the continued growth in AI-related capital expenditures and the pressure on discretionary consumer spending, it may become increasingly difficult for investors to generate excess returns in the future by "going long on stocks benefiting from AI capital expenditures and avoiding white-collar consumption-related stocks." The bank recommends that investors begin to make selective adjustments, as the strong outlook for AI capital expenditures may already be largely reflected in asset prices, while the resilience of U.S. consumers should not be underestimated.

Led by Savita Subramanian, Bank of America strategists stated in a report on Monday that one of this year's core market trades is the divergence between surging AI-related investment and shrinking discretionary consumer spending. The latter is partly affected by the loss of white-collar jobs, but this trend has now been fully reflected in investor portfolios.

AI Capital Expenditure Trade Becoming Crowded—BofA Suggests Selective Adjustment

Subramanian noted that obtaining excess returns in the future by buying stocks benefiting from AI capital expenditures and selling those related to white-collar consumption may require greater effort. She pointed out that it is now time for selective adjustments because underestimating the willingness of U.S. consumers to spend entails risk, while the theme of strong capital expenditures may already be largely priced in by the market.

BofA's analysis of solely long-only active funds shows that the allocation proportions in the so-called "AI-impacted sectors," including information technology services, consumer finance, and software, have approached historical lows. Meanwhile, relative to the consumer discretionary sector, fund allocation to industrial stocks is near historical highs.

From a sub-industry perspective, fund managers are currently most overweight in the electronic equipment, instruments, and components sector. This means that market bets on "AI capital expenditure over consumption" are already quite concentrated. If such trades become even more crowded, the incremental excess return space for investors may narrow—even if AI investment remains robust.

BofA previously stated last week that as U.S. consumer spending stays strong and household balance sheets are healthy, market risk distribution has tilted to the upside, and investors can consider adopting a more aggressive stance.

White-Collar Employment Under Pressure—Consumer Trend Shifts from "Wants" to "Needs"

However, BofA does not believe that pressure in the consumer sector has completely dissipated. As an increasing number of high-paying jobs in sectors impacted by AI face risks, Subramanian expects that white-collar professionals will continue to demonstrate consumption downgrading—meaning spending shifts further from "want-based goods" to "necessities."

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

The pressure on some discretionary consumer companies is particularly pronounced. For example, sportswear company Lululemon (LULU.US) has seen its stock price cumulatively decline by about 50% over the past year. In BofA's view, this portfolio structure remains reasonable. The bank previously regarded the shift of economic growth drivers from consumption to capital expenditure as one of this year's core investment themes.

"Capital Expenditure Superior to Consumption" Still Valid, But Harder to Capture Excess Returns

In its annual outlook published last November, BofA strategists explicitly argued that "capital expenditure is superior to consumption" and anticipated that AI-related spending would continue to be an important force supporting capital expenditures.

Therefore, BofA is not completely overturning its previous investment logic, but rather believes that as this view gradually becomes market consensus, related opportunities are increasingly reflected in investor portfolios and asset prices.

In other words, AI capital expenditures may still remain strong, white-collar employment and some discretionary consumer areas may continue to face pressure, but simply relying on long-only strategies in AI investment beneficiary sectors and avoiding consumer sectors may no longer yield pronounced excess returns as easily as before.

As AI-related asset positions become increasingly crowded, U.S. consumer spending and household balance sheets continue to demonstrate resilience. This also prompts BofA to suggest that investors should start selectively looking for previously overlooked opportunities, rather than continuing to simply chase the now-mainstream AI capital expenditure trade.