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AI Spending is Slowing Down. How Will the S&P 500 React?

AI Spending is Slowing Down. How Will the S&P 500 React?

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AI NewsAugust 9, 2026·5 min read

Institutional investors are increasingly naming artificial intelligence spending as the top tail risk to equity markets, with fund managers warning that record corporate cash deployment into AI infrastructure may deliver only temporary earnings boosts rather than sustainable growth. The concentration of the S&P 500 in the largest tech names means a slowdown in hyperscaler spending could trigger a sharp selloff with broader market consequences.

  • 45% of fund managers now cite an AI bubble as the biggest tail risk, up from 28% in June, displacing inflation concerns.
  • The five largest hyperscalers plan to deploy over $1 trillion across 2025 and 2026 on AI infrastructure investments.
  • The top 20 S&P 500 stocks account for 50.8% of total market capitalization, the highest concentration in 50 years.
  • 45% Fund managers naming AI bubble as top tail risk versus 28% prior month
  • $1T+ Hyperscaler AI spending expected across 2025 and 2026 combined
  • 50.8% Top 20 S&P 500 stocks’ share of total index market capitalization

Wall Street continues reaching record highs, yet a chorus of institutional investors has begun sounding a different alarm. Artificial intelligence itself, not broader economic risks, now sits atop the list of tail risks that fund managers track most closely.

Bank of America’s July Global Fund Manager Survey quantified the shift: 45% of respondents named an AI bubble as the biggest threat to markets, a jump of 17 percentage points from June’s 28%. That figure displaced inflation, the prior month’s top concern, in a striking reordering of institutional priorities.

The survey also identified hyperscaler spending on AI infrastructure as the most likely source of a credit event, naming a specific channel through which the sector’s excesses could trigger broader market damage.

Record AI Spending Masks Deteriorating Earnings Quality, Analysts Warn

The mechanics of how AI spending inflates near-term earnings have become central to the institutional debate. Companies deploying hundreds of billions into AI infrastructure often recognize that spending as a one-time boost to profit statements rather than as sustainable operating performance.

Forward earnings growth for the S&P 500 is accelerating at a record pace, yet much of that expansion stems directly from companies funneling unprecedented cash into artificial intelligence capital expenditure. That spending flows through income statements as a temporary accounting benefit, not as evidence of durable competitive advantage or recurring revenue growth.

The Bank for International Settlements issued a formal warning earlier this year that Big Tech’s spending spree risks hardening into a prolonged investment bust, a scenario in which trillions deployed fail to generate proportional returns. The scale of planned deployment underscores the stakes.

The five largest hyperscalers alone expect to commit more than $1 trillion across 2025 and 2026, a figure without historical precedent in technology infrastructure. If that capital deployment yields earnings growth that proves temporary rather than sustainable, the subsequent earnings revision downward could trigger significant equity repricing.

The concern extends beyond balance sheet mechanics. Ordinary households now hold equity exposure relative to their wealth at levels exceeding past market cycles, which means a sharp selloff triggered by AI spending disappointment would inflict deeper losses on retail investors than the dot-com crash did.

S&P 500 Concentration Amplifies Risk From Any Slowdown in Tech Spending

The structural composition of the S&P 500 itself has become the transmission mechanism for AI spending risk. J.P. Morgan Global Research estimates that the top 20 stocks now represent roughly 50.8% of total index capitalization, a concentration level unseen in the index’s 50-year history.

That figure means buying the S&P 500 as a proxy for broad market exposure has become functionally equivalent to taking a concentrated bet on the AI spending cycle and the handful of companies driving it.

The practical implication troubles portfolio construction at institutional scale. An investor seeking diversified exposure across 500 companies increasingly finds that half of that index’s market value resides in fewer than four percent of holdings. The remaining 480 companies contribute less to index performance than the single largest holding in many cases.

That dynamic inverts traditional index logic: broad diversification becomes narrow concentration by stealth.

When the top five stocks move sharply, the index moves with them regardless of earnings or valuation trends in the broader market. A slowdown in AI spending that affects those five names would ripple through the index in magnified form.

Global Fund Managers Signal Reduced Conviction in Hyperscaler-Driven Growth

Beyond the survey data, institutional positioning reveals shifting conviction. Bank of America’s same report identified long positions in global semiconductors as the world’s most crowded trade, suggesting that institutional capital has already built substantial exposure to AI-related hardware and supply chains.

When the most crowded trade sits in assets dependent on continued AI spending acceleration, institutional managers face crowding risk: all participants attempting simultaneous exit if the AI thesis deteriorates could amplify downside velocity.

The shift in fund manager priorities also reflects a widening gap between near-term earnings growth and the underlying business fundamentals supporting it. Record corporate bond and equity issuance continues to fund AI spending sprees, yet that external capital deployment differs fundamentally from organic cash generation.

Companies raising capital explicitly to finance AI infrastructure cannot claim that spending as proof of underlying operational strength. The financing itself becomes a signal: firms must access external capital markets at scale because internal cash generation alone cannot sustain the investment pace required to remain competitive in AI infrastructure deployment.

The accounting treatment compounds the optical problem. Capitalized spending on data centers and GPU clusters eventually flows through depreciation schedules that reduce reported earnings in future periods.

Near-term boost becomes medium-term headwind, a reversal that could surprise markets if investors have priced in perpetual earnings acceleration without discounting the depreciation phase to come.

Institutional Investors Face Judgment Call on S&P 500 Valuation Sustainability

The fundamental question confronting institutional allocators has narrowed to a specific binary. Either the AI spending cycle yields returns sufficient to justify the investment pace and the earnings growth it generates, or the bulk of that capital deployment represents a capital misallocation that will depress future returns once depreciation and opportunity costs come into focus.

The S&P 500’s extreme concentration means that binary outcome applies with force to the entire index.

Current conditions leave little room for surprise revision. Valuations across large-cap technology reflect confidence that AI spending will scale profitably and sustainably.

Fund manager surveys suggesting AI bubble risk at 45% conviction indicate that roughly half of institutional capital managers privately harbor material doubts about that thesis, even if they continue holding long positions in the assets dependent on it.

That gap between stated conviction and portfolio positioning creates fragility: positions held despite elevated tail risk consciousness exit sharply if confidence deteriorates from any direction.

The next critical signal will emerge from second-quarter and third-quarter earnings reports, which will reveal whether actual AI-related capital deployment matches forward guidance and whether management commentary sustains or revises hyperscaler spending plans. If management teams dial back 2025 and 2026 capex guidance citing returns disappointment or capital efficiency concerns, the shift in fund manager consensus from 45% AI bubble risk to majority conviction could trigger sudden repricing. Bank of America and other institutional surveys will provide monthly updates on fund manager positioning; the next published tally will indicate whether institutional conviction in AI spending sustainability is eroding or stabilizing.

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Bank of America Warns That AI Investors Are in for a Nasty Reality Check

Bank of America Warns That AI Investors Are in for a Nasty Reality Check

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AI NewsJuly 7, 2026·5 min read

Bank of America has warned that speculation in high-multiple technology stocks has reached extreme levels, with valuations now decoupled from earnings at a scale unseen since the 1920s. For institutional crypto investors, this signals potential systemic stress in equity markets that could trigger institutional capital reallocations and heightened volatility across asset classes, including digital assets.

  • S&P 500 up 9% year-to-date after best quarter since 2020, driven by AI-heavy tech stocks with subdued earnings
  • Shiller CAPE ratio at 41, compared to 32.5 on Black Tuesday 1929, signaling extreme valuation disconnection from fundamentals
  • Bank of America warns high-multiple stock rally historically precedes sharp valuation reversals and potential market snapback
  • 41 Current Shiller CAPE ratio versus 32.5 in 1929
  • 9% S&P 500 year-to-date gains through end of last quarter
  • $300 Morgan Stanley price target for SpaceX, double current trading price

Bank of America issued a stark warning Tuesday that equity markets have entered dangerous territory, with speculation in high-multiple technology stocks reaching the kind of extremes that have historically preceded sharp market reversals.

The S&P 500 has climbed 9 percent year-to-date and achieved its best quarter since 2020, yet much of those gains concentrate in artificial intelligence companies burning through capital expenditure on data centers while reporting subdued or negative earnings.

The valuation gap between what these stocks trade at and what they actually earn has widened to levels not witnessed in a century, according to measures tracked by institutional analysts.

Shiller CAPE Ratio Reaches 41, Exceeding 1929 Pre-Crash Levels

The Shiller cyclically adjusted price-to-earnings ratio, a long-term valuation metric that smooths earnings over a decade, now stands at 41, a figure that surpasses the 32.5 level recorded on Black Tuesday, October 29, 1929, the day of the market’s worst collapse in modern history.

This comparison carries particular weight for institutional investors because it suggests the current equity environment exhibits greater valuation excess than the period immediately preceding the Great Depression, a distinction that rarely appears in mainstream financial analysis.

The ratio measures how expensive the overall stock market is relative to its historical earnings power. When the metric reaches extremes, it typically indicates that equity prices have become untethered from the underlying ability of companies to generate profits.

The 1929 comparison is not meant as a prediction of identical outcomes, but rather as a calibration point for understanding how far current valuations have deviated from historical norms and fundamental economic reality.

Technology companies invested heavily in artificial intelligence infrastructure represent the largest contributors to this valuation inflation.

These firms have sustained multi-trillion-dollar market capitalizations despite capital expenditure levels that currently exceed or consume all operating profits, leaving limited room for shareholder returns or evidence of positive return on invested capital.

The disconnect between the scale of these investments and any demonstrated path to material profitability has alarmed Wall Street analysts tasked with reconciling price with value.

Bank of America Identifies Pattern Preceding Valuation Snapback

In its Tuesday note to clients, Bank of America identified a specific pattern: high-multiple stocks have “gapped up demonstrably,” a technical move that has historically preceded sharp valuation corrections the firm termed a “snapback.” The language signals confidence that the current rally, while impressive on surface metrics, rests on unsustainable foundations and may reverse suddenly rather than gradually.

Capital Economics analysts reinforced this concern, telling media outlets that “this volatility is, in our view, evidence of excessive froth and calls into question the sustainability of this rally.” The statement reflects a growing divide among institutional investors between those maintaining bullish positioning and those reducing exposure or hedging downside risk.

Markets have already experienced warning tremors: a major sell-off in late June wiped out hundreds of billions of dollars in market value across the S&P 500, though indices recovered much of those losses in subsequent weeks.

The June volatility extended beyond U.S. borders. Asian equity markets experienced significant swings, a pattern that analysts interpret as potential early signaling of broader institutional concern. When international markets begin repricing downward, it often precedes U.S. market adjustments because global capital flows reflect real-time assessments of systemic risk across multiple geographies.

The absence of a clear catalyst for these swings, combined with their severity, suggests underlying nervousness about valuation sustainability rather than response to specific corporate or economic news.

SpaceX Ratings and the AI Bet That May Not Pay Off

Despite these warnings, bullish sentiment persists in pockets of Wall Street. This week, Morgan Stanley and Goldman Sachs issued extremely optimistic ratings on SpaceX, setting price targets of $300 and $205 respectively against the company’s current trading price of $150.

Morgan Stanley’s target implies a 100 percent upside from current levels, a bold call in an environment Bank of America itself has flagged as dangerously extended.

SpaceX itself has become a case study in the AI-spending dynamics that concern analysts. The space company went public weeks before the late-June market sell-off and has structured operations with heavy emphasis on artificial intelligence infrastructure.

During the late-June downturn, SpaceX stock plummeted back to its $150 initial offering price, erasing all post-listing gains, a vivid illustration of how quickly sentiment can reverse even in high-profile, well-capitalized technology firms.

The divergence between bullish Wall Street price targets and cautionary warnings from major institutional analysts reflects genuine disagreement about whether AI capital expenditure will eventually generate returns that justify current valuations, or whether companies are engaged in a competitive dynamic that forces spending regardless of profitability prospects.

For investors allocating capital, the dispute remains unresolved, and competing narratives continue to sustain the kind of volatility and valuation disconnect that Bank of America has identified as unsustainable.

What Institutional Crypto Investors Should Monitor in Equity Market Stress

For institutional investors active in cryptocurrency markets, this equity environment carries direct implications. Crypto asset prices often correlate with institutional risk appetite and access to leverage from traditional financial institutions.

When equity markets experience the kind of sudden repricing or volatility spike that Bank of America warns may be imminent, institutional crypto positions frequently face forced liquidations as prime brokers and lending desks reduce leverage across all asset classes simultaneously.

The pattern has repeated across multiple market cycles: stress in equity markets, particularly among technology stocks, triggers a chain reaction of deleveraging that extends into cryptocurrency markets. Bitcoin and Ethereum have historically shown negative correlation with equity drawdowns during periods of broad risk-off positioning, even though longer-term correlations vary.

If equities experience the kind of valuation snapback Bank of America describes, institutional capital reallocation away from speculative assets would likely create near-term headwinds for crypto positioning.

Additionally, the current environment raises questions about the sustainability of venture capital and private equity funding flows that have sustained much of the crypto infrastructure buildout.

If the AI bubble deflates and institutional investors recognize diminished returns on data center spending and related technology infrastructure, capital available for speculative or early-stage venture investments in blockchain technology may contract sharply.

Institutional investors should monitor whether the S&P 500’s valuation extremes persist through year-end earnings season, watch for any further volatility spikes comparable to the late-June sell-off, and track whether major investment banks revise their equity allocation models downward in response to valuation warnings from peers like Bank of America, any of which could signal imminent institutional deleveraging that extends across alternative assets including cryptocurrency markets.

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Bank of America CEO says Trump will ease trade tensions in 2026

Bank of America CEO says Trump will ease trade tensions in 2026

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Bank of America’s chief executive believes the Trump administration will pivot toward easing trade tensions in 2026, even as tariff policies continue to reshape economic conditions across the United States. During an appearance on CBS News’ Face the Nation, Brian Moynihan outlined expectations for a period of de-escalation rather than further trade friction, suggesting that average tariff rates could stabilize around 15% rather than climb higher.

Tariff Trajectory and Market Outlook

The remarks from Moynihan arrive as markets grapple with the effects of successive rounds of import duties. Since taking office, the Trump administration has implemented tariffs in phases, beginning with an approximate 10% baseline across most imported goods in April.

By July, new tariffs were introduced targeting key trading partners, pushing average rates to approximately 15.2%. According to recent data, the overall US tariff rate has climbed from roughly 2% before Trump’s return to office to approximately 14% currently.

Going from a 10% rate across the board to 15% for most countries is not a huge change.

— Brian Moynihan, Chairman and CEO, Bank of America

Moynihan’s characterization of the rate adjustment as modest signals confidence that market volatility tied to tariff uncertainty may ease. His framing suggests the financial sector views the current trajectory as more measured than the initial shock to markets earlier in the year.

Key Data Point

US average tariff rates have increased from 2% to 14% since Trump took office, with new policies pushing select trading partners to 15.2% under current proposals.

Bank of America’s Position in the Financial Sector

As one of the largest financial institutions in the United States, Bank of America maintains significant exposure to both domestic and international markets. The bank’s operations span consumer banking, wealth management, and corporate and investment banking divisions, making it highly sensitive to macroeconomic conditions shaped by trade policy.

Moynihan’s optimistic stance on tariff stabilization reflects Bank of America’s strategic interest in reducing uncertainty that constrains lending, investment, and consumer spending. Financial institutions benefit from stable policy environments where they can more accurately model risk and price financial products.

The bank’s quarterly earnings reports have consistently noted trade policy as a variable affecting client sentiment and capital allocation decisions. By publicly endorsing a de-escalation narrative, Moynihan seeks to influence market psychology and reduce the volatility that creates headwinds for financial performance across the sector.

China and Regional Trade Agreements

The Bank of America executive acknowledged that China presents a distinct challenge within the broader tariff framework. Beijing’s status as the world’s second-largest economy and a major US trading partner creates different dynamics than relationships with other nations.

US-China trade tensions represent the most significant variable in the tariff equation. China accounts for approximately 20% of US imports and receives roughly 7% of US exports, making bilateral negotiations critical to overall trade policy outcomes. The two nations remain in active dispute over intellectual property, manufacturing practices, and market access—issues that transcend simple tariff negotiations.

Additionally, Moynihan noted that a scheduled review of the US-Mexico-Canada Agreement in 2026 will test whether trade tensions can genuinely ease. These negotiations could determine the trajectory of North American commerce over the coming years. The USMCA, which replaced NAFTA in 2020, serves as the framework for approximately $1.3 trillion in annual trilateral trade and involves complex provisions on labor standards, environmental compliance, and digital commerce.

Despite these complex negotiations ahead, Moynihan maintained that visible progress is already apparent. His message attempted to reassure stakeholders that the administration has a coherent strategy rather than pursuing indefinite escalation.

Sectoral Impact and Supply Chain Realignment

Tariff policies have prompted significant realignment across multiple industries. Manufacturing sectors dependent on imported components—including automotive, electronics, and industrial equipment—face margin compression as production costs rise. Some companies have begun reshoring operations or diversifying sourcing away from tariffed nations, representing long-term structural shifts in global supply chains.

Consumer goods companies face different pressures, as tariffs on finished products imported from Asia and elsewhere flow through to retail prices. Early data suggests consumers have absorbed some price increases, though demand elasticity varies significantly by product category and income level.

The financial sector’s concern centers on whether tariff-driven uncertainty suppresses business investment and consumer confidence sufficiently to trigger economic contraction. Bank lending standards typically tighten during periods of heightened uncertainty, reducing credit availability precisely when some businesses need financing to absorb higher input costs.

Small Business Headwinds and Labor Market Shifts

According to Moynihan’s assessment, small businesses faced genuine pressure during the second quarter due to tariff increases and policy uncertainty. However, the pressure appears to have eased as the year progressed and rate increases moderated.

Interestingly, Moynihan shifted focus to what he characterized as a more pressing challenge for small enterprises: workforce recruitment. Rather than tariffs, he argued that finding and retaining employees now represents the primary constraint on business growth.

What small businesses find challenging at the moment is not tariffs, but rather locating employees.

— Brian Moynihan, Chairman and CEO, Bank of America

This assessment reflects broader labor market dynamics, with Moynihan noting that employment challenges persist despite immigration policies adopted by the Trump administration. Those policies had not yet fully taken effect at the time of his remarks, suggesting that workforce pressures could intensify or ease depending on implementation details.

The labor shortage narrative carries particular significance because it suggests potential inflationary pressure independent of tariff effects. If businesses cannot find workers to expand operations, wage pressures may emerge even as tariffs stabilize. This dynamic complicates the Federal Reserve’s monetary policy decisions, which must balance inflation concerns against growth considerations.

Context

Small business sentiment shifted from tariff concerns in Q2 to labor market challenges by the time of Moynihan’s remarks, indicating evolving economic headwinds throughout the year.

Legal and Administrative Perspectives

Within the Trump administration, officials have expressed confidence in the legal foundation for tariff policies. Kevin Hassett, director of the National Economic Council, stated that the administration expects the US Supreme Court to rule favorably on the constitutional authority to impose tariffs.

This legal confidence underpins the administration’s willingness to maintain and adjust tariff policies without significant concern about court challenges overturning the entire framework. However, ongoing debates among economists and trade analysts continue regarding whether tariff escalation ultimately benefits the broader economy.

Constitutional scholars have noted that presidential authority under Section 301 of the Trade Act and other statutory provisions grants substantial discretion in trade matters. Legal challenges would face high barriers in establishing that tariff implementation violated constitutional constraints.

Economic Modeling and Market Implications

Moynihan’s perspective as a major financial institution leader carries weight in policy circles. His statement that de-escalation rather than escalation is anticipated represents a significant signal to markets that trade tensions may not persist indefinitely.

The Bank of America CEO’s comments suggest the financial sector is positioning for a scenario where tariff rates stabilize rather than climb further. This outlook, if accurate, could provide some relief to corporate earnings forecasts and investment planning assumptions across sectors dependent on international supply chains.

Financial modeling by major institutions increasingly incorporates tariff stabilization assumptions rather than continued escalation scenarios. This shift in baseline forecasts affects equity valuations, credit spreads, and currency movements. Sectors most sensitive to tariff levels—including industrials, consumer discretionary, and technology—have shown increased correlation with tariff policy announcements.

Path Forward and Conclusion

As 2026 approaches, the actual outcome of trade policy will depend on negotiating outcomes with major partners, court decisions, and political calculations within the Trump administration. Moynihan’s remarks represent an educated assessment from someone monitoring economic data continuously, but they remain a forecast rather than a guarantee of policy direction.

The Bank of America CEO’s public stance serves multiple purposes simultaneously: it reassures market participants that tariff uncertainty may be waning, it signals to the administration that financial sector support hinges on eventual de-escalation, and it positions Bank of America as a credible voice in policy debates surrounding economic conditions.

If tariff rates do stabilize near 15% and remain there through 2026, businesses would gain the certainty necessary to make long-term investment decisions. This outcome would likely prove supportive for economic growth and financial sector profitability. Conversely, if tariff rates continue climbing or renewed negotiations trigger fresh uncertainty, the positive sentiment Moynihan expressed could prove premature.

The tariff policy environment remains fluid, with multiple decision points and negotiation opportunities ahead. Moynihan’s optimistic framing reflects hope that pragmatic economic considerations will eventually constrain escalation dynamics, but the path from current conditions to that stabilized state remains uncertain and contested across political and economic spheres.

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Bank of America flags Australian bonds as big winners in post-dollar world

Bank of America flags Australian bonds as big winners in post-dollar world

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Bank of America is pointing global investors toward Australia, predicting that its sovereign bonds are poised to outperform in what it calls a “post-dollar” world.

In a research note released Wednesday, FX strategists Oliver Levingston, Adarsh Sinha, and Janice Xue highlighted Australia’s fixed-income market as a likely hotspot for capital inflows amid ongoing global de-dollarization.

“De-dollarization was a major theme on our trip to the United States and Canada, and we continue to highlight the significant impact small shifts in global fund managers’ asset allocations could have on the demand profile for AUD fixed income.”

The note makes the case that Australia’s relatively small bond market could experience dramatic price swings if global investors keep fleeing U.S. dollar-denominated assets.

Investors have been looking for more sound and undervalued alternatives as the greenback has lost its previously unassailable haven status, particularly after almost a year of political and economic tumult under President Donald Trump.

Investors dump dollar amid Trump-era volatility

The report directly attributes the trend to increasing global discomfort with U.S. financial stewardship. The re-emergence of Donald Trump on the political scene, along with a fresh wave of belligerent trade policies and what the bank calls “economic nationalism,” has only hastened investor diversification.

Trump’s declaration of sweeping tariffs earlier this year, which markets dubbed “Liberation Day,” set off a global market selloff. Investors stampeded to pull out of U.S. markets, anxious about protracted uncertainty and trade isolationism.

This “Sell America” movement was marked by heavy selling of Wall Street stocks, U.S. Treasurys, and even the dollar itself. The U.S. dollar index (DXY), which measures the greenback against a basket of leading currencies, has slid by about 9% year-to-date in 2025, its most significant decline in over 10 years.

Investor conviction in the dollar is non-existent; as Bank of America’s June Global Fund Managers Survey showed, 86% of respondents believe the dollar will devalue in the coming 12 months, a new record low.

The report found fund managers with less of a long-dollar bias than at any time in the past 20 years. Almost 20 percent of the 222 managers polled with $587 billion under management said that betting against the dollar was the most “crowded trade” globally.

This loss of confidence has paved the way for other currencies, particularly those linked to stable economies rich in raw materials like Australia, to gain the favor of global reserve managers and institutional investors.

Central banks boost demand for AUD bonds

Now, Australia is feeling the consequences of that change in sentiment. Its 10-year government bond yield is about 4.24%, which is not that different from the U.S. equivalent of 4.43%. But Bank of America sees this gap widening in the years ahead.

By late 2026, the bank predicts that Australian bonds will have a 75 basis point spread, which would entail stronger demand and higher prices.

The note said that the demand outlook for AUD fixed-income assets appeared strong with support from Australia’s growing superannuation funds and the possibility of bank deregulation.

One big reason is the rising demand for “peripheral dollar bloc assets,” consistently stable currencies in faraway lands from American politics, supported by strong local fundamentals. The proportion of official reserves in Australian dollars has doubled in the past ten years. The strategists estimate that a 1-percentage-point lift in global reserve demand would absorb 185% of the net supply of Australian sovereign bonds for the current fiscal year.

Australia’s large pension funds have also been moving into the local bond market with increasing vigor. These superannuation funds are internationalizing their balance sheets, and the demand for AUD-denominated assets flows.

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