Bank of America warns: Multiple AI-related risks could challenge the rally in European stocks

Investing.com – The era of easily profiting from AI-related stocks may finally be coming to an end. Over the past year, investors have viewed the AI revolution as a positive factor that would only increase corporate profits, but a recent report from Bank of America Global Research indicates that the market is beginning to recognize the “double-edged sword” nature of this technology.

The bank currently forecasts that the Stoxx 600 index will decline by 15% by Q2 2026. This bearish outlook stems from an increasingly clear understanding: although AI will create winners, it also poses significant “displacement risks” to sectors like insurance, asset management, and traditional software.

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One of the biggest warning signals emphasized by BofA is the current market consensus on earnings growth.

BofA analysts point out that global stock prices are currently based on an expected annualized earnings growth of 17% over the next five years, which now appears overly optimistic because it overlooks the likelihood that AI competition will erode existing profit margins.

Essentially, companies may be forced to invest more in AI just to maintain the status quo, which will eat into their profit margins. There’s also the factor of “disappointing productivity.” While the market prices U.S. productivity growth close to 3%, the Congressional Budget Office (CBO) projects that productivity growth over the next decade could be as low as 0.1%. If AI fails to deliver the large-scale efficiency gains investors have already paid for, valuation gaps could suddenly narrow.

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Because trades in semiconductors, mining, and capital goods—considered “AI infrastructure”—appear overvalued, BofA has officially downgraded the semiconductor sector to a sell rating. Analysts believe investors are now genuinely worried about excessive corporate spending on AI capital expenditures, especially with high electricity costs and elevated DRAM prices.

So, where should “safe” money flow? The report suggests shifting toward sectors less affected by AI disruption or that benefit from higher risk premiums. The bank currently favors “boring” defensive sectors like food and beverages, telecommunications, and chemicals.

Interestingly, the bank maintains a buy rating on the software sector. Although this sector has recently taken a hit, BofA believes that for companies with proprietary data and deep integration into customer workflows, the “worry factor” has been exaggerated. For these companies, AI could actually serve as a defensive moat rather than a destructive force.

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