Wall Street hedge funds have already backed away from AI. BofA’s economists warn the rest of the economy may not be able to.
In a report Monday, BofA Global Research economists called a sustained correction in the AI trade “one of the larger risks to the US and global economy.” A slowdown would hit growth directly through spending, and indirectly through the wealth effect — when falling stock prices make households feel poorer and spend less.
The warning follows a three-week stretch in which AI stocks lost about $5 trillion in market value. The Nasdaq 100 (^NDX) ended Friday about 9% below its Oct. 6 record, though stocks are rebounding early Monday.
AI isn’t just a stock market story anymore. It’s an economy story.
Investment in computers, other information-processing equipment, and software added more than 1 percentage point to third quarter GDP growth of 3.4%, according to Yahoo Finance calculations using Bureau of Economic Analysis data. That’s about a third of the total. In two quarters of 2025, it added more than the whole economy grew.
There’s a silver lining. BofA’s economists say growth now reaches well beyond AI. Without AI-related spending, the economy grew more than 2% last quarter, up from about 1% at the start of the year.
Stocks have never been a bigger share of Americans’ savings
Chances are your 401(k) is in on the AI trade, too. Stocks made up a record 48% of Americans’ financial assets in the second quarter, according to Federal Reserve data going back to 1945. That tops the 39% peak of the dot-com bubble.
That wealth is lopsided. The richest 10% of households own 88% of stocks, according to Federal Reserve data, so a lasting AI selloff would hit the biggest spenders hardest.
The pros aren’t waiting around. Hedge funds are underweight the broader AI trade for the first time since early 2023, according to Morgan Stanley’s prime brokerage data. That follows the biggest sustained cut to their stock exposure in its records.
They haven’t fully let go of Big Tech, though. Hedge funds’ sensitivity to the Magnificent Seven — how closely their returns move with the group — was in the 97th percentile of its history as of Oct. 26, according to a Nomura note. That’s a lot of exposure heading into year-end, when leveraged investors are least willing to stomach losses.
The bill for all that building keeps landing in the bond market. On Monday alone, Oracle (ORCL) launched a $10 billion bond sale alongside a $10 billion stock offering, Reuters reported, and Alphabet (GOOGL) kicked off its second euro bond sale this year. Oracle stock fell Monday morning.
Source: finance.yahoo.com
