Tech's Air Pocket: The Costly AI Race

Bank of America sees turbulence ahead for tech giants. They're bullish on the sector, but caution against blinding optimism. With expectations rising to dizzying heights, tech could be heading for an 'air pocket'.

AI Spending Frenzy

In 2023, companies like Alphabet, Meta, and Oracle have announced plans to blow $725 billion on AI projects. It's a mad dash to dominate in AI, but the spending spree has consequences. The giants have shifted from being capital-light to capital-heavy. No longer cash cows, they've become heavily burdened beasts.

BofA analysts, led by Savita Subramanian, highlight this shift. They suggest investors aim for hardware makers, the capex takers. These are the ones benefiting from AI's extravagance, unlike those burdened by risky expenditures. The funding rate is lying to you again.

The Risky Business Model

With increased investment, return on capital risks shrinking. BofA likens Big Tech's current state to oil companies. Sure, there's potential for huge gains, but it's a tightrope walk. Only Meta and Google have somewhat better returns, but they're riding on recent market disruptions, not sustainable growth.

Is this sustainable? If AI replaces high-paying jobs, enterprise spending could skyrocket. But it might also hammer consumer spending, which makes up about 70% of the US GDP. Everyone has a plan until liquidation hits.

Future Uncertain

So, what do we make of this? The tech sector's AI investments might lead to innovation, but the rocky financial road can't be ignored. Investors need to question if the current tech race is an opportunity or a trap. Bullish on hopium. Bearish on math.

Zoom out. No, further. See it now? The numbers tell a different story, and it's one where the tech industry must tread carefully or risk a financial reckoning.