BofA's Hartnett sees AI rally into 2027 if GOP holds Senate

BofA's Hartnett sees GOP Senate win fueling AI rally into 2027; Democratic sweep risks 10% drop.

The analysis comes from Michael Hartnett, chief investment strategist at BofA Securities, who framed the Texas governor's race between Republican incumbent Greg Abbott and Democratic challenger Gina Hinojosa as a referendum on living costs and AI data center expansion.

Texas hosts 335 data centers with 247 more in planning. Abbott recently paused new grid connections for data centers, a reversal for a governor who called Texas the "epicenter of AI development" in November. The BofA Bull & Bear indicator sits at 9.3, in "sell" signal territory, while fund manager equity positioning is at the 99th percentile and private client equity allocation hit an all-time high of 66.4 percent.

The stakes are binary: a Republican hold on the Senate plus Abbott's re-election would be read as a green light for AI capital expenditure and data center expansion, with projected AI capex exceeding $1 trillion by 2027. A Democratic sweep would force a repricing of AI investments and risk assets, with the 30-year Treasury yield already at 5.126 percent, a 25-year high.

Texas election becomes AI referendum

The Texas race has taken on outsized importance because the state has become the epicenter of the AI buildout. Abbott's recent decision to order an audit of data center grid connections and pause new approvals reflects growing voter concern about energy costs and grid strain. Polling shows Abbott leading Hinojosa by just one percentage point, with rural voters — who live near many planned data centers — showing narrower support for the incumbent.

Record crowding raises downside sensitivity

The market's positioning problem is acute. BofA's Bull & Bear indicator at 9.3 remains in "sell" territory. Private client equity allocation reached 66.4 percent, an all-time high, while cash allocation fell to 9.4 percent, a record low. Bond allocation dropped to 17 percent, the lowest since March 2022. Global fund flows for the week through Aug. 12 showed $16.1 billion into stocks, $23.8 billion into bonds, and $6.3 billion into gold, with U.S. equities attracting $15.6 billion for a third consecutive week.

The 30-year Treasury yield hit 5.126 percent, a 25-year high, while U.S. government debt approaches $40 trillion and is projected to reach $50 trillion by 2029. Interest expense over the past 12 months reached approximately $1.4 trillion. BofA argues that only a 5-year Treasury yield below 3.25 percent would meaningfully ease government debt service costs. The October 28 Federal Reserve meeting, six days before the midterms, carries a 55 percent probability of a rate hike priced by markets.

S&P 500 earnings grew 32 percent in Q2, well above the 23 percent expected at the start of the reporting season, and the index is up about 14 percent year-to-date. Korea's KOSPI has surged 78.7 percent. Hartnett's team argues the bull market isn't over yet — true market tops require excessive positioning, overly optimistic earnings expectations, and policy tightening simultaneously. But with positioning already extreme, the midterm elections could determine whether this rally becomes a bubble or a correction.

This article is for informational purposes only and does not constitute investment advice.