When the capital expenditure of AI giants shifts from &#34;printing money&#34; to &#34;shredding money,&#34; a dramatic change concerning liquidity and asset pricing may be brewing.
With 9 months to go before the U.S. midterm elections, Bank of America’s top analyst Michael Hartnett elevated his market warning to a new level in the latest &#34;Flow Show&#34; report released on February 15.
Compared to the &#34;alert&#34; three days ago, Hartnett's views this time are sharper and more specific. He pointed out that as expectations for AI capital expenditure (Capex) are further revised upward, the &#34;AI disruption trade&#34; is spreading at an astonishing speed from the tech sector to traditional services.
For investors, the real signal for a turning point may depend on one action: when will tech giants &#34;back down&#34; and cut spending.
<h2>$740 billion: From &#34;printing money&#34; to &#34;shredding money&#34;</h2>
The most impactful new information in Hartnett's report is the repricing of AI capital expenditures.
Just three days ago, the market was digesting a spending expectation of $670 billion, but this time Hartnett pointed out that the capital expenditure expectation for hyperscalers has soared to $740 billion by 2026. This astronomical figure is not only astonishing but also dangerous.
Such reckless investment will have extreme financial consequences: &#34;This could push the free cash flow of the Magnificent 7 to zero, or even negative.&#34;
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/26392783-6dd2-466a-b4f2-0bf305f0e9f4.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/26392783-6dd2-466a-b4f2-0bf305f0e9f4.png"/>
To maintain this level of capital expenditure, tech giants may be forced to embark on a massive bond issuance frenzy. This means that tech growth stocks, which once had perfect balance sheets, are now fully &#34;creditized.&#34;
Hartnett believes that the current market narrative is accelerating from &#34;awe of AI&#34; (AI-awe) to &#34;being impoverished by AI&#34; (AI-poor).
In this context, Hartnett provided a very clear trading signal:
<blockquote>
&#34;The most obvious catalyst to reverse this situation will be an announcement from a hyperscale AI company to cut capital expenditure.&#34;
</blockquote>
Once this happens, it will directly trigger a sharp rotation from tech giants to &#34;Main Street&#34; assets.
<h2>&#34;Wildfire-like&#34; spread of AI disruption effects</h2>
If you think the impact of AI is only confined to tech stocks, you are mistaken. The latest research report shows that the disruptive effects are wildly spreading to traditional services.
Hartnett referred to this phenomenon as &#34;wildfire AI disruption.&#34; He listed the timeline of the spread of AI's impact:
<blockquote>
&#34;(Above) On Monday, it was the insurance brokers that collapsed, on Tuesday it was the wealth advisors, on Wednesday it was the real estate services, and on Thursday it was logistics...&#34;
</blockquote>
It is worth noting that the first sector to be disrupted by AI—the Indian tech stocks in Q1 2025 (such as Infosys, TCS)—have yet to see any buying support. This means that once identified by the market as &#34;AI victims,&#34; their stock price recovery will be a long way off.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/c877cef5-bbca-4726-913b-1ea3f76b2028.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/c877cef5-bbca-4726-913b-1ea3f76b2028.png"/>
<h2>Political Countdown: February 24</h2>
Hartnett again reminds us that political factors are exacerbating this rotation.
Hartnett points out that Trump's support on Wall Street has reached an all-time high, but his support on Main Street (the general public) has hit an all-time low (with dissatisfaction over inflation reaching 36.4%).
Hartnett clearly states that the State of the Union address on February 24 will be a critical juncture.
<blockquote>
&#34;If there is no so-called 'Trump bump' at that time, the government is expected to turn to more aggressive 'affordability' policies to win the midterm elections.&#34;
</blockquote>
To appease voters anxious about AI, these policies may include lowering energy, healthcare, and housing costs, which could involve controlling the yield curve (YCC) to distribute money (universal basic income), further benefiting small-cap stocks rather than those lofty tech giants.
From the perspective of holdings and price performance, Hartnett believes that the strategy of &#34;going long on Main Street and short on Wall Street&#34; is taking effect. Since the interest rate cut on October 29, asset performance has been extremely polarized:
<ul>
<li>Winners (Inflation/Main Street assets): Silver (+56%), South Korea KOSPI (+34%), Brazil Bovespa (+30%), Energy (+20%).</li>
<li>Losers (Bubble/Wall Street assets): Mag 7 (-8%), cryptocurrencies (-41%), software sector (-30%).</li>
</ul>
<h2>Yen: From Safe Haven to &#34;Long Bull&#34; Signal</h2>
In terms of asset prices, Hartnett has captured a historically significant signal change.
The correlation between the yen and the Nikkei index has turned positive for the first time since 2005.
Simply put, when the yen rises, the Japanese stock market also rises. Hartnett believes:
<blockquote>
&#34;Nothing illustrates a 'long-term bull market' better than a rising exchange rate alongside a rising stock market.&#34;
</blockquote>
This phenomenon has occurred in Japan from 1982 to 1990, in Germany from 1985 to 1995, and in China from 2000 to 2008.
Although this is a long-term positive for the Japanese stock market, in the short term, a strong yen has exacerbated the pain of liquidations in cryptocurrencies, silver, and software stocks. Hartnett specifically warns of the &#34;red line&#34; for the exchange rate:
<blockquote>
&#34;Japan cannot tolerate the disorderly surge of the yen (i.e., the yen to US dollar exchange rate falling below 145). This would crush Japanese exporters, impact global liquidity, and has historically coincided with global deleveraging.&#34;
</blockquote>
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/f85e7382-aff6-4b57-a404-56f73bb2390d.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/f85e7382-aff6-4b57-a404-56f73bb2390d.png"/>
<h2>Capital Flow: Sell Signal Still On</h2>
Despite a global stock market inflow of $46.3 billion this week, it seems everyone is still buying:
<blockquote>
<ul>
<li>Stock inflow: $46.3 billion</li>
<li>Bond inflow: $25.4 billion</li>
<li>Cash inflow: $14.5 billion</li>
<li>Gold inflow: $3.4 billion (“no panic selling”)</li>
<li>Cryptocurrency inflow: $100 million, and after Bitcoin experienced about a 50% drop from its historical high last October, accompanied by leveraged liquidations, “the selling has also ended.”</li>
</ul>
</blockquote>
However, Bank of America's Bull &amp; Bear Indicator reading has slightly decreased from 9.6 to 9.4, still within the “sell” zone.
At the same time, Hartnett reminds us that the &#34;sell signal&#34; for risk assets (which started on December 17) remains valid.
Hartnett insists that the adjustment for risk assets is not over. Only when people start to panic and hoard cash, and tech stock positions decrease, will the indicator need to fall to around 8 for the adjustment signal that began in December to be truly lifted.
<blockquote>
<ul>
<li>Cash ratio has significantly increased from a historical low of 3.2% to 3.8% or higher;</li>
<li>Bonds have rebounded from a net underweight of 35% to a net underweight of 25% or less;</li>
<li>Tech stocks have decreased from a net overweight of 17% to neutral;</li>
<li>Consumer staples have rebounded from a net underweight of 30% to a net underweight of 10% or less.</li>
</ul>
</blockquote>
<h2>50-Year &#34;Great Rotation&#34; Review: Major Events Ignite, Leadership of Assets Changes, Next Target is Emerging Markets and Small-Cap Stocks</h2>
Hartnett explains the current situation in his weekly report using the &#34;Great Rotation of the Past 50 Years&#34;: Major political, geopolitical, and financial events often change asset leadership—
<ul>
<li>1971 End of the Bretton Woods System: New leaders were gold and physical assets (up 417% from 1971-1980), while laggards were bonds and financial assets (only 67%).</li>
<li>1980 Reagan/Thatcher/Volcker Shock: Inflation peaked (14.8% on March 14, 1980), and the 10-year US Treasury yield fell from 16% to 6% in 1985, making bonds the leaders.</li>
<li>1989 Fall of the Berlin Wall, Globalization, and Deflation: The relative position of US stocks in global assets hit a 75-year low, with commodities lagging in the 1990s; copper was even the only asset to show negative annualized returns in the 1990s.</li>
<li>2001 &#34;9/11&#34; and China's WTO Accession: The laggards were the US dollar and tech stocks, while the leadership shifted to emerging markets/commodities and resource financial sectors</li>
<li>QE and Buybacks After the 2009 Financial Crisis: U.S. stocks became leaders again, with private equity and growth rising (the proportion of technology/telecom/healthcare in ACWI increased from 24% in 2008 to 44% in 2020; financial/energy/materials decreased from 44% to 20%).</li>
<li>2020 Pandemic and Monetary Fiscal Expansion: U.S. government spending increased by 56%, nominal GDP grew by over 50%; leaders included the &#34;Seven Giants,&#34; while laggards were bonds (U.S. 30-year Treasury bonds fell by 50% from 2020 to 2023).</li>
</ul>
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Looking ahead, Hartnett predicts that the next round of structural leaders will be: emerging markets and small-cap stocks. The support he provides includes:
<ul>
<li>From U.S. Large-Cap Growth to Small-Cap Value: A shift from services to manufacturing, from asset-light to asset-heavy, and rising costs in the AI arms race; he also pointed out that hyperscalers have issued $170 billion in bonds over the past five months, significantly higher than the pace of about $30 billion per year from 2020 to 2024, with widening spreads beginning to create pressure.</li>
<li>From the U.S. to Emerging Markets: He describes global rebalancing as &#34;New World Order = New World Bull Market,&#34; and mentions a new &#34;Anything But Dollar (ABD)&#34; trade; he also emphasizes that asset allocation to China and India remains very low, while both countries are now two of the four largest economies in the world; he noted that Chinese bank stocks have quietly risen to an eight-year high.</li>
</ul>
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/47c81415-dac0-42e5-89d3-d23f5beb16dc.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/47c81415-dac0-42e5-89d3-d23f5beb16dc.png"/>

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Bank of America Hartnett's latest report warns that capital expenditures for AI super-scale enterprises are expected to reach $740 billion by 2026, leading to a depletion of free cash flow. Once a giant announces spending cuts, it will become a key signal triggering a major rotation in U.S. stocks from tech stocks to small-cap stocks and emerging markets. Furthermore, AI's disruption of the service industry is spreading like wildfire, from insurance to logistics. In addition, the correlation between the yen and Japanese stocks has turned positive for the first time in 20 years, indicating a long bull market

- The article discusses a significant shift in capital expenditure among AI giants, as predicted by Michael Hartnett of Bank of America, soaring from $670 billion to $740 billion.  
- Hartnett warns that this expenditure could lead to extreme financial consequences, potentially pushing free cash flow of major tech companies to negative values.  
- He suggests a major catalyst for change will be when an AI giant announces cuts in capital spending, triggering a rotation from tech stocks to assets closer to consumers.

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Bank of America Hartnett: "AI Disruptive Trading" Accelerates Spread, Once Tech Giants Cut Spending, It Will Trigger a "Rotation Tsunami" in US Stocks