This is flying under the radar but could yield risk-off moves in popular tech stocks, says Bank of America

Bank of America strategists, led by Michael Hartnett, identify exceptionally low tech-credit spreads—currently at 18-year lows—as a critical, under-the-radar risk metric for the AI boom. This indicates investor complacency in funding AI data center buildouts, suggesting a potential precursor to risk-off moves in popular tech stocks and other speculative market segments.

Analysis

Bank of America strategists, led by Michael Hartnett, have identified a significant, yet underfollowed, risk indicator for the artificial intelligence sector. Tech-credit spreads, which they term the 'most important new metric of risk,' are currently at 18-year lows. This indicates a high degree of investor complacency, as market participants are not demanding additional yield to fund the massive capital expenditures required for the AI data center buildout. The 'well-behaved' nature of these spreads suggests a potential vulnerability, as a reversal or widening could trigger a broader risk-off move. Such an event would likely impact not only popular technology stocks at the center of the AI boom but also other speculative, high-risk areas of the equity market.

Key Decisions for Investors

• Investors should begin actively monitoring tech-credit spreads as a key forward-looking indicator for potential weakness in the technology sector.
• For portfolios with heavy concentration in AI-related technology stocks, it may be prudent to review position sizes and consider implementing hedging strategies against a potential sentiment reversal.
• Caution is advised regarding exposure to other high-beta market segments, as a pullback triggered by widening credit spreads could have a contagious effect beyond the immediate tech sector.