BofA Morning Market Tidbits: A sustained correction in the AI trade is a major risk to the global economy

Key takeaways Investors are increasingly concerned about the sustainability of the AI trade, and the more capex rises, the more risks loom. Tighter financial conditions are also a related risk, especially for regions not reaping the fruits of the AI capex cycle. Today's events: Sep construction spending, Oct ISM manufacturing, and comments from Fed's Goolsbee. Source: BofA Global Research, Haver The AI trade and financial conditions on investors' minds Investors are increasingly concerned about the AI trade, and the more capex keeps growing, the more risks loom.

Will firms be able to monetise their investments, or could the speed of adoption disappoint? An eventual slowdown can hit GDP growth not just directly but also via wealth effects. The tightening in global financial conditions is also a first-order risk. AI capex and financial conditions are connected, with higher interest rates at least partly reflecting increased supply to finance AI investment Tighter financial conditions are an uneven shock However, an exogenous tightening of financial conditions can be especially detrimental for regions that are not reaping the fruits of the AI capex boom, like Europe.

In contrast, amid strong US GDP growth spreading beyond AI capex and years of above-potential growth signalling overheating, it is hard to justify the Fed's inaction. A lack of clarity around the path for geopolitical tensions adds to the broader cautious sentiment. Claudio Irigoyen Global Economist BofAS Antonio Gabriel Global Economist BofAS Stephen Juneau US Economist BofAS