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AI Investment Growth and Global Policy Shifts Poised to Drive Market Returns Despite Volatility
2025 has shown to be a strong year in markets—both in the US and abroad—leaving investors wondering how much is left in this rally. The big themes of the past year—uncertain fiscal policy, the AI surge, China's overcapacity, record fiscal deficits, and excess liquidity—are evolving rather than disappearing. As the world begins to better understand how artificial intelligence impacts economic growth, inflation, and corporate investment, BofA Global Research economists and strategists are bracing for more volatility in 2026. The AI-driven equity boom remains a defining feature of the "K-shaped" economy, adding another layer of risk.
"Despite these lingering concerns, our team remains bullish on the economy and AI," said Candace Browning, head of BofA Global Research. "We are optimistic on the two most influential economies, expecting above-consensus GDP growth for the US and China. Furthermore, concerns about an imminent AI bubble are overstated, in our view, and we expect AI investment to continue to grow at a solid pace in 2026."
Key macro calls made for the markets and economy in the year ahead are:
- More bullish than consensus on 2026 US GDP growth
Senior US Economist Aditya Bhave is expecting 4Q/4Q GDP growth of 2.4% in 2026. The US Economics team's above-consensus views are fueled by several factors: an expected boost by the One Big Beautiful Bill Act; increased business investment due to restoration of Tax Cuts and Jobs Act benefits; trade policy; fiscal stimulus; and the lagged effects from rate cuts by the Federal Reserve. - AI boom – but no bubble yet
AI investment spend has already boosted GDP growth and our economists expect continued growth next year. Our analysis of past bubbles suggests the technology sector of the US stock market is still on solid ground. - Emerging Markets get a boost
Head of Global Emerging Markets Fixed Income Strategy David Hauner says a weaker US Dollar, lower rates, and low oil prices provide a solid backdrop for emerging markets to continue to perform well in 2026. - China's economy forges ahead
Helen Qiao, greater Chief China economist and head of Asia Economics, raised our China GDP growth forecast to ahead of consensus, and is now expecting 4.7% growth in 2026 and 4.5% in 2027. With positive signs emerging from recent trade talks and stimulus taking hold, risks to our forecast are skewed to the upside. - Muted S&P returns, while capex surges
Savita Subramanian, head of US Equity Strategy, expects 14% EPS growth but only 4-5% S&P price appreciation, with a year-end target of 7100 for the index. We are watching for signs that suggest we could be shifting from a consumption-driven bull market to a capex-driven one. - UST yields could surprise to the downside in 2026; Two Fed cuts expected
Nearly half of investors we surveyed expect the 10Y Treasury to end 2026 between 4-4.5%, which is flat to up from current levels. Fed cuts and a focus on lowering inflation may mean investors are too pessimistic on bond prices. Mark Cabana, head of US Rates Strategy, expects the 10Y to end 2026 at 4-4.25% with risks to the downside. Our US economists expect the Fed to cut rates by 25 basis points at the December 2025 meeting and twice in 2026 (June and July). - Flattish home prices with risks to the upside; may vary by region
Chris Flanagan and our Securitized Products team expect housing to become front and center in 2026. We expect flat home price appreciation and an improvement in housing turnover. Risks are skewed to the upside dependent on Fed policy. - Expect volatility, especially as AI impact becomes more clear
A better understanding of the impact that AI has on growth, inflation and capex will likely cause market volatility. The K-shaped economic recovery and fiscal dominance are other sources of expected turbulence. - Private credit returns likely lower in 2026; High Yield looks more attractive
Head of US Credit Strategy Neha Khoda expects 5.4% total returns for private credit in 2026, down from 9% this year. This potential for lower returns will impact allocation decisions, and investors may pivot to high-yield bonds or other asset classes instead. - Copper to perform on tight supply, strong demand
Copper has pushed higher this year even with tepid demand from manufacturing and construction. Metals Strategist Michael Widmer expects continued supply challenges in 2026, and additional tailwinds could come from easier monetary and fiscal policy; reduced policy and trade uncertainty; and renewed demand.
BofA Global Research
The BofA Global Research franchise covers approximately 3,500 stocks and over 1,300 credits globally and ranks in the top tier in many external surveys. Most recently, the group was named No. 2 Global Research Firm of 2024 by Institutional Investor magazine; No. 1 in the 2025 Institutional Investor Developed Europe survey; No. 1 in the 2025 Emerging Europe, Middle East & Africa survey; No. 2 in the 2025 Institutional Investor All-America survey; and No. 2 in the 2024 Institutional Investor Global Fixed-Income Research survey. For more information about any awards cited, visit https://rsch.baml.com/awards.
Bank of America
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melissa.anchan@bofa.com
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SOURCE Bank of America Corporation
