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1. MSCI Europe is on track to deliver 6% YoY EPS growth in 2Q25, with Banks contributing more than half to the index growth.

2. The average capex-to-sales ratio of the biggest spenders has almost doubled from 10% to 20% in the past 18 months.

The largest tech firms have hugely increased their capex to develop custom AI chips, build vast data centres and invest in power supply to satisfy the insatiable needs of large language models.

That leaves AI stocks subject to three main risks:

• Rising duration risk increasingly exposing them to higher interest rates

• Over-investment driving down AI margins

• Innovation gains from LLMs that are likely no longer exponential but incremental, leaving valuations looking precarious

3. Tech stocks face a material risk from the capital cycle.

When too much capital floods into an industry, it typically leads to oversupply, falling prices, and reduced margins. That forces bankruptcies and consolidation, leading to undersupply and rising prices. That eventually draws in new entrants and capex rises again.

This time could be different, of course, but there is mounting anecdotal evidence that the improvement in LLMs is leveling out.

4. “There has yet to be any meaningful rise in productivity since LLMs went mainstream in 2022.”

Firms that have invested in AI have found that while it can be enormously useful, it has drawbacks, especially with tasks that involve more expertise than fluency.

Companies, again anecdotally, are unwilling to fully implement AI systems as the edge cases where AI struggles can be sufficiently catastrophic so that leaving the system unsupervised is too great a risk.

However, valuations of tech stocks have yet to price in this reality-expectation gap for LLMs.

It’s no surprise to any market practitioner that tech companies have some of the highest valuations, but it’s still breathtaking when you see just how big the gap is with the rest of the market. (see below)

Last but not least, paying 10 times sales for a stock is fairly punchy at the best of times, but it’s even more so if Nvidia and AMD’s agreement to pay the US for 15% of chips sales to China sets a precedent. That’s assuming firms in China keep buying US chips, with a report today indicating they have been advised not to purchase Nvidia’s H20s.

5. All-in on the Mag7 stocks.

169 surveyed fund managers with $413 billion in assets said in August that the 'Long Magnificent 7' is the most crowded trade.

Professionals, foreigners, and retail investors are heavily invested in these stocks.

Source: BofA

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