The current year isn't 2000, and a tech bubble isn't on the horizon, yet this doesn't imply investors should disregard potential market volatility, according to Bank of America Research. Savita Subramanian, who leads U.S. Equity and quantitative strategy at BofA Securities, has contended that in contrast to the dotcom period, the present AI surge has bolstered profit expansion, smaller initial public offerings, and “speculation in unprofitable stocks is less extreme.” Nevertheless, she cautioned that the substantial investments in capital by hyperscalers are becoming more dependent on borrowed funds, posing a risk to those investors still anticipating profits.
TL;DR
- Bank of America Research warns of potential market volatility despite no imminent tech bubble.
- AI surge fuels profit expansion, but hyperscalers' debt-funded capital spending poses risks.
- Investors should prepare for an "air pocket" as AI monetization and infrastructure build-out are uncertain.
- Skepticism and cautious capital expenditure by tech giants temper excessive AI enthusiasm.
“Is this 2000? Are we in a bubble? No,” Subramanian said during BofA’s outlook call on Tuesday. “Will AI continue unfettered in leadership? Also no.”
Subramanian unpacked her thoughts in a recent note on the future of AI, which she sees as somewhere between fully reliable and an all-out bubble burst, where capital spending is still greater than revenue growth. “On AI, in our view, investors should get ready for an air pocket,” Subramanian wrote. “Monetization is to be determined (TBD) and power is the bottleneck and will take a while to build out. So for now investors are buying the dream.”
BofA took a more bearish stance on its stock market outlook for 2026 as a result of these air pocket concerns, forecasting just a 4% upside for the S&P 500 from where it currently sits. It breaks from the more bullish takes of analysts, including Deutsche Bank’s bet on a 17% jump at the end of next year and market veteran Ed Yardeni’s prediction of the S&P growing another 10% from this year to next.
Jean Boivin, director of the BlackRock Investment Institute, echoed Subramanian’s viewpoint regarding the AI surge, stating at a media discussion on Tuesday that market and investor skepticism is sufficient to alleviate significant worries about an inflated market.
“We don’t think the bubble framing is that useful at this stage for investors,” Boivin said. “There is so much talk about the potential of the bubble … people are conscious of the risk. It’s when there’s no discussion of that that we should be more worried.”
Healthy skepticism
According to Subramanian, the positive aspect of the current AI surge is the apparent existence of established safeguards to temper excessive enthusiasm for AI. This encompasses suggestions for portfolio distribution: Despite the increased dominance of the top 10 firms within the S&P 500 index accounting for 40% of its market capitalization, Apollo's lead economist, Torsten Slok, has advocated for broader investment variety.
“One should have some exposure to the S&P 500 and should certainly also have some exposure to AI,” Slok told Coins2Day in July. “But it’s very clear that [owing to] the market’s extreme focus and concentration on this story, this is the time to have a conversation around, What are the things I should be doing with my money?”
Beyond minor initial public offerings and excessive betting on companies without profits, Subramanian noted, financial markets are exhibiting a degree of caution regarding the capital expenditures of major technology firms. Meta's financial results released in October sparked a selloff, which caused its stock price to fall by 9%, came after Chief Executive Officer Mark Zuckerberg acknowledged the firm increased its capital expenditure forecast by $2 billion.
‘Air pocket’ wariness
The continued capex push is also what has made analysts jittery about an AI air pocket. According to Bank of America, investors are right to be concerned with hyperscalers’ rising capex spending, particularly on data centers, which surged 53% year-over-year to $134 billion in just the first quarter of this year, Dell’Oro Group found. Google became the latest tech giant to expand its data center footprint last month, pledging $40 billion to growing its AI compute infrastructure in Texas.
However, “capex funded by operating cash flow is running out,” Subramanian pointed out, as hyperscalers are increasingly financing their activities via loans. She observed that the availability of AI infrastructure has grown by over 1,000% between 2024 and 2025.
In fact, BofA analyst Yuri Seliger stated in a research report during the previous month that the five major cloud providers—Amazon, Google, Meta, Microsoft, and Oracle—issued $121 billion in debt this year, a substantial fourfold increase compared to the typical debt these firms have issued annually over the past five years. Seliger further commented that he anticipated an extra $100 million in debt would be secured in 2026.
By IBM CEO Arvind Krishna’s back-of-the-napkin math, these hyperscalers’ big bets on growing AI supply won’t be worth it, as they will be unable to turn a profit from the steep investment in data centers. They will be made vulnerable from AI’s rapidly advancing technology, which would render today’s infrastructure obsolete.
“It’s my view that there’s no way you’re going to get a return on that because $8 trillion of CapEx means you need roughly $800 billion of profit just to pay for the interest,” Krishna said in a Monday episode of the Decoder podcast. “You’ve got to use it all in five years because at that point, you’ve got to throw it away and refill it.”
