BCA warns AI trade could unravel as hyperscaler cash flows dwindle

Investing.com -- BCA Research cautioned that the artificial intelligence (AI) trade could falter if free cash flows at major hyperscalers continue to weaken, a dynamic that may drag down broader equity markets.

“While it is impossible to know exactly when global equities will peak, there are now enough vulnerabilities to justify keeping one’s finger near the eject button,” the analysts wrote.

They compared market fragility to “asking which snowflake will trigger the next avalanche,” noting that bear markets often stem from the accumulation of risks investors can no longer ignore.

Among those risks, BCA highlighted an overreliance on AI-related stocks.

“Equity investors have generally held the view that ‘if it doesn’t affect Nvidia’s earnings, I don’t care.’ That attitude is understandable, but it is likely to be proven flawed if the economy experiences a meaningful downturn,” the firm said.

With companies such as Meta and Google reliant on advertising, a slowdown in consumer spending would quickly hit revenues, BCA warned.

The report pointed to history as a guide. The firm noted that in both 2000 and 2021, stock prices peaked before corporate capital spending declined, as investors reacted first to shrinking free cash flows.

“Past experience suggests that investors often get jittery when free cash flows begin to decline,” BCA said.

While hyperscaler capital expenditure may not peak until the second half of 2026, BCA argued that equity prices in AI-linked names, which now make up about a third of S&P 500 market capitalisation, “could swoon well before then.”

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