Key Points:
- Bank of America advises buying small and mid-cap stocks over tech giants.
- U.S. President Trump’s push to lower living costs hurts big corporate profits.
- “Main Street” companies are expected to boom before the midterm elections.
- Big Tech firms are spending nearly all their cash on AI infrastructure.
Strategists at Bank of America are telling investors to switch gears. The team, led by Michael Hartnett, believes the best bets right now are small and mid-sized U.S. companies. As the country heads toward the midterm elections, the bank advises buying “Main Street” stocks and selling “Wall Street” heavyweights.
The main driver behind this strategy is President Donald Trump’s aggressive new policies. The administration is intervening directly to lower the prices of essentials like energy, healthcare, housing, and electricity. While lower bills help voters, these government moves eat into the profits of major sectors. Big banks, pharmaceutical companies, and energy titans are all feeling the pressure.
Investors are already reacting to this shift. Money is moving out of the technology sector as fears grow about disruptions from artificial intelligence. Instead, traders are hunting for companies that will benefit from the administration’s efforts to fix the cost-of-living crisis. A broad range of firms that rely on economic growth are currently performing better than the usual market leaders.
The numbers show a clear trend. The Nasdaq 100, which is dominated by tech companies, just posted its biggest three-day drop since last April, falling 4.6%. Meanwhile, the standard S&P 500 is lagging behind indexes that give equal weight to smaller companies.
Bank of America warns that the era of dominance for the “Magnificent Seven” tech stocks might be fading. The bank sees a major threat to its leadership as these companies shift from low-cost models to heavy spending.
The cost of the AI race is astronomical. Estimates show that the biggest tech firms will spend about $670 billion on capital expenditures this year. That is roughly 96% of their total cash flow. In comparison, they only spent 40% of their cash on these costs in 2023. Because they are spending so much to build data centers and chips, they no longer have the best balance sheets or the extra cash to buy back their own stock.
Hartnett has a strong track record lately. His advice to look at international stocks back in late 2024 proved correct. Now, he says the smart money is moving away from the tech giants and toward the smaller players on Main Street.
