After a Strong 2025 for Markets — Both in the United States and Globally — Bank of America Maintains a Constructive Outlook for 2026: It Expects a K-Shaped Economic Recovery, Solid Growth in AI Investment, Increased Volatility, Moderate Returns for the S&P, Two Rate Cuts (in June and July), and Momentum in Emerging Markets.
“The major themes of the past year — uncertain fiscal policy, the AI boom, excess capacity in China, record fiscal deficits, and surplus liquidity — are evolving rather than disappearing,” the U.S. bank noted.
“As the world begins to better understand how artificial intelligence impacts economic growth, inflation, and corporate investment, economists and strategists at BofA Global Research are preparing for more volatility in 2026. The AI-driven stock market boom remains a defining feature of the K-shaped economy, adding another layer of risk,” it added.
“Despite these persistent concerns, our team remains optimistic about the economy and AI,” said Candace Browning, Head of BofA Global Research.
“We are optimistic about the two most influential economies, and we expect above-consensus GDP growth for the U.S. and China. Furthermore, in our view, concerns about an imminent AI bubble are overstated, and we expect AI investment to continue growing at a solid pace in 2026,” she added.
The main macro projections for markets and the economy in the coming year are:
U.S. GDP: More Optimistic Than the Consensus
Aditya Bhave, Senior U.S. Economist at BofA, expects Q4/Q4 GDP growth of 2.4% in 2026. The U.S. Economics team’s above-consensus forecasts are based on several factors: an expected boost from the “One Big Beautiful Bill Act”; increased business investment due to the restoration of benefits from the “Tax Cuts and Jobs Act”; trade policy; fiscal stimulus; and the lagged effects of Federal Reserve rate cuts.
AI Boom, but Still No Bubble
Spending on AI investment has already boosted GDP growth, and the bank’s economists expect it to continue growing next year. Their own analysis of past bubbles suggests that the U.S. equity market’s tech sector still rests on solid foundations.
Moderate S&P Returns as Capex Picks Up
Savita Subramanian, Head of U.S. Equity Strategy, expects 14% EPS growth but only a 4–5% price appreciation in the S&P, with a year-end target of 7100 for the index. The bank’s experts are watching for signs that we may be shifting from a consumer-driven bull market to one driven by capital investment (capex).
Two Rate Cuts in the Year
Nearly half of investors surveyed by Bank of America expect the 10-year Treasury to end 2026 between 4–4.5%, meaning stable or even higher than current levels. Fed rate cuts and a focus on lowering inflation could indicate that investors are being overly pessimistic about bond prices. Mark Cabana, Head of U.S. Rate Strategy, expects the 10-year yield to finish 2026 at 4–4.25%, with downside risks.
U.S. economists forecast that the Fed will cut rates by 25 basis points at the December 2025 meeting and twice in 2026 (June and July).
Flat Home Prices With Upside Risks
Chris Flanagan and the Securitized Products team expect housing to take center stage in 2026. BofA forecasts flat home price appreciation and improved turnover/activity in the housing market. Risks are tilted to the upside depending on Fed policy.
More Volatility Due to AI Impact
A better understanding of AI’s impact on growth, inflation, and capex is likely to drive market volatility. The K-shaped economic recovery and fiscal dominance are additional expected sources of turbulence, according to the bank.
Private Credit Returns, Lower in 2026?
Neha Khoda, Head of U.S. Credit Strategy, expects total returns of 5.4% for private credit in 2026, down from 9% this year. The potential for lower returns will impact allocation decisions, and investors may rotate toward high-yield bonds or other asset classes.
A Boost for Emerging Markets
David Hauner, Head of Emerging Markets Fixed Income Strategy, stated that a weaker U.S. dollar, lower interest rates, and reduced oil prices provide a solid backdrop for emerging markets to continue performing well in 2026.
