Bank of America’s team led by chief investment strategist Michael Hartnett said in an Aug. 14 report that the 2026 U.S. midterm elections could mark a decisive turning point for the AI trade in U.S. equities.
The bank said that if Republicans retain control of the Senate and Texas Governor Greg Abbott wins re-election, markets may treat the result as a signal that AI capital expenditure and data center expansion will continue. Under that scenario, U.S. stocks, particularly AI shares, could keep advancing and may slip into a bubble-like phase in 2027.
If Democrats win both the Senate and the Texas governorship, BofA said AI investment and risk assets could be repriced. In that case, U.S. stocks could fall by more than 10%, while the dollar and bond yields would also move lower.
BofA framed the Texas governor’s race as a referendum on “cost of living and AI data centers.” The report said Texas already has 335 data centers, with another 247 in planning.
The bank added that the current bullish case still has fundamental support. S&P 500 earnings growth reached 32% in the second quarter. AI capital spending is projected to exceed $1 trillion by 2027. U.S. stocks are up about 14% this year, and AI supply-chain markets such as South Korea have risen even more.
Still, the report said optimism is already crowded. BofA’s bull-and-bear indicator remains in sell-signal territory. Private client equity allocations have risen to 66.4%, a record high. Bond allocations have fallen to 17%, and cash allocations stand at just 9.4%, a record low.
BofA said heavy positioning does not mean the bull market ends immediately, but it does leave markets more sensitive to negative surprises.
The bond market is the biggest potential constraint, according to the report. U.S. government debt is approaching $40 trillion. Interest expense over the past 12 months was about $1.4 trillion. The 30-year Treasury yield recently climbed to 5.126%, the highest level in 25 years.
BofA said a true bull-market end usually requires three conditions at once: excessive positioning, excessive earnings optimism, and tighter policy. Two of those conditions are already in place, leaving election outcomes and the path of interest rates as the key variables that will decide whether this rally remains a strong advance or turns into a full-blown bubble.