Anyone checking their 401(k) this fall could be forgiven for thinking Wall Street has shaken off its worries.
The S&P 500 ended October 22 at 7,623.68, up 11.4% for the year and just 2.5% below its October 6 record. More recently, however, the rally has lost some steam. After three years of AI-fueled gains, the S&P 500 has managed a more modest 3% advance over the past three months.
For investors who stayed in the market through its twists and turns, those are comforting numbers as they look toward 2027.
But in a note shared with me, Bank of America’s Michael Hartnett sees a major problem hiding behind the gains.
As we all know, the AI boom that has helped power stocks depends on extraordinary spending on chips, data centers, and electricity. Much of that expansion touches the bond market, where borrowing costs are rising and lenders are getting choosier.
Hartnett worries investors are overlooking what happens if that money becomes harder to raise. In Bank of America’s October survey, which was shared with me, just 6% of fund managers expected a hard economic landing.
He sees three possible paths for 2027, including one that could leave stock market investors painfully exposed.
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Bank of America warns AI financing could threaten stocks in 2027
Wall Street’s still betting the house on AI heading into 2027, but Michael Hartnett feels it’s overlooking the enormous cost of keeping the boom alive.
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For perspective, BofA semiconductor analyst Vivek Arya estimates spending by major cloud companies could climb from a whopping $860 billion in 2026 to $1.2 trillion in 2027, nearly 40% growth as reported by Biggo. Moreover, to finance that tremendous investment in chips and energy infrastructure, businesses are turning to debt markets.
Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META), and Oracle (ORCL) issued $194 billion in bonds through July 7, Reuters reported, compared with $108 billion throughout 2025, and that dependence on borrowing is precisely what worries Hartnett.
He warns that hyperscaler bond spreads widening beyond 200 basis points, or two percentage points above comparable benchmark yields, could trigger forced selling and broader financial stress.
Lenders are already distinguishing between borrowers.
JPMorgan’s October analysis identified credit-default swap spreads of 50 to 120 basis points for financially stronger AI companies, versus roughly 300 basis points for some infrastructure borrowers and 1,100 basis points for a heavily leveraged borrower.
