LIVE MARKETS-Not in a bubble, but "air pockets" ahead for AI stocks - BofA

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NOT IN A BUBBLE, BUT "AIR POCKETS" AHEAD FOR AI STOCKS - BOFA

Savita Subramanian, head of U.S. equity & quantitative strategy at BofA Securities, said in the firm's 2026 outlook call on Tuesday that she sees "air pockets" ahead in the technology sector even as she does not see a bubble.

"Earnings growth has supported technology so far," she said, but she noted that the issue of artificial intelligence monetization is "now front and center."

Not all AI spending is cheered, she said, adding that "capex funded by operating cash flow is running out" and that "capex growers have chronically underperformed."

The firm expects the S&P 500 .SPX to end next year at 7,100, up from the index's current level of 6,836.

Stocks sold off recently amid concerns over AI exuberance and lofty tech valuations.

The firm has a marketweight rating on technology .SPLRCT, while it has raised its rating on consumer staples .SPLRCS to overweight from underweight and it has lowered it rating on consumer discretionary .SPLRCD to underweight from marketweight.

It also has a marketweight rating on industrials .SPLRCI, while BofA remains underweight communication services .SPLRCL and utilities .SPLRCU. It is overweight financials .SPSY, real estate .SPLRCR, materials .SPLRCM healthcare .SPXHC and energy .SPNY.

Subramanian noted that the firm is watching for signs that suggest the market could be shifting from a consumption-driven bull market to a capex-driven one.

Also on the call, Jill Carey Hall, head of BofA's U.S. small- and mid-capitalization strategy, said she sees a "constructive backdrop for small caps."

"We expect small caps to outperform in 2026, with earnings to drive returns," she noted.

(Caroline Valetkevitch)

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