LIVE MARKETS-S&P 500 could see muted returns in coming months amid AI spending concerns - BCA

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S&P 500 COULD SEE MUTED RETURNS IN COMING MONTHS AMID AI SPENDING CONCERNS - BCA

BCA Research is forecasting below-average returns for the S&P 500 over the next one to three months, reflecting a more cautious outlook for US equities.

The brokerage in a note on Friday said it recommends a slight "underweight" stance on global stocks, arguing that slowing economic growth and lofty profit expectations could leave markets vulnerable to disappointment.

Its "MacroQuant" model projects largely flat equity returns for the S&P 500 in the months ahead and expects market volatility to increase.

The cautious outlook follows a sharp selloff in technology-related stocks last week that hurt broader Wall Street, as disappointing results from Amazon AMZN.O, Alphabet GOOGL.O and Intel INTC.O fueled concerns that the AI spending boom is becoming increasingly costly and may not be generating adequate returns.

"Meanwhile, the AI capex boom is looking increasingly shaky. Unless sales grow rapidly, it will be difficult to prevent tech earnings from sputtering," BCA's chief economist, Peter Berezin, and others wrote in a recent note.

The brokerage noted that US corporate profit margins remain near record highs even as analysts continue to forecast strong earnings growth. At the same time, nominal GDP growth is slowing and rising wage pressures could weigh on margins if revenue growth weakens.

While BCA is not forecasting an imminent collapse in AI-related spending, it believes the investment cycle is entering its later stages. Demand for AI infrastructure remains robust, with GPUs still in short supply, but the firm expects a more volatile market backdrop alongside more modest stock market gains.

The model currently favors defensive US sectors such as utilities, healthcare and consumer staples over more cyclical parts of the market.

(Kanishka Ajmera)

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