Bank of America is pushing back against the stagflation narrative that had many allocators on edge just months ago. The firm now sees mounting evidence that the U.S. economy is veering away from a worst-case scenario and positioning instead for a cyclical upswing.
While many global managers still expect stagflation—defined as a period of slowing growth and persistent inflation—the BofA team is increasingly leaning toward a more bullish thesis. In its latest note to clients, the bank cited a growing minority of institutional investors expecting a “boom” scenario, with above-trend growth and inflation, fueled by policy support, aggressive capital investment, and cyclical recovery signals.
“We agree with this building minority,” BofA strategists wrote, citing corroborating signals from their internal quantitative models.
Here are three reasons the firm believes the risk of stagflation is diminishing:
1. Pro-Growth Tailwinds from Trump’s Policy Agenda
BofA views the return of Donald Trump’s America-first agenda as a potential economic catalyst. The bank pointed to forthcoming fiscal measures in Trump’s proposed “Big Beautiful Bill” that could include infrastructure investment, tax incentives, and reshoring-friendly policies aimed at reviving domestic manufacturing.
“With midterm elections on the horizon, the political incentive to deliver near-term growth is strong,” BofA strategists noted. “This administration is likely to lean heavily into pro-growth fiscal tools, including industrial policy and public investment.”
For advisors, this reinforces the importance of maintaining exposure to sectors poised to benefit from stimulus and domestic-capex tailwinds—namely industrials, energy, and infrastructure-linked equities.
2. Surge in Strategic Capital Investment—Especially AI and Infrastructure
Capital expenditure, particularly in artificial intelligence, manufacturing, and infrastructure, is accelerating faster than many expected. BofA analysts project $700 billion in AI-related capex by hyperscalers through 2025–2026, with upward revisions each quarter. That trend, they argue, is structural—not cyclical.
Moreover, foreign and domestic manufacturers continue to announce plans to expand U.S. operations, while state and local governments ramp up infrastructure programs to modernize aging public capital stock.
“The industrial buildout is real, and it’s just getting started,” the report said. “Capital is being deployed with a long time horizon, which is rare this late in a business cycle.”
This investment boom could provide a sustained earnings tailwind, particularly for U.S.-focused mid-cap names with exposure to construction, semiconductors, and logistics infrastructure.
3. The U.S. Economy Is Showing Early Signs of Recovery
BofA’s proprietary U.S. Regime Indicator, which tracks macro and market data to gauge business cycle positioning, currently places the economy in a late-stage “downturn”—but potentially on the cusp of recovery.
The indicator posted modest improvement in June, with six of its key components showing positive movement. According to the strategists, these shifts suggest the U.S. economy may already be transitioning into the early stages of an expansion.
Here are the six factors BofA flagged as improving:
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Earnings Revisions: EPS revisions have sharply improved. As of April, negative revision breadth was at -25%, but by June, it had recovered to -5%, signaling renewed optimism for corporate profits.
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GDP Outlook: Despite a Q1 contraction, real GDP is projected to rebound strongly in Q2, with a 2.8% annualized growth estimate. That forecast implies surprising resilience in underlying demand.
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Manufacturing Momentum: The ISM Production Index climbed to 50.3 in June, crossing into expansionary territory. That’s a key signal for advisors watching cyclical reacceleration.
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Improving Leading Indicators: The Conference Board’s Leading Economic Index (LEI), while still negative year-over-year, is showing signs of stabilization. Some components are starting to trend upward.
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Capacity Utilization: Utilization rates for installed production capacity improved on a year-over-year basis, suggesting businesses are scaling up operations after a period of underuse.
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Tighter Credit Spreads: High-yield credit spreads have narrowed significantly, reflecting investor confidence and easing financial stress in corporate credit markets.
For wealth managers, the combination of stronger-than-expected earnings trends, a firming labor market, and continued capital investment makes a compelling case for staying fully allocated—even as traditional recession models flash caution.
Positioning Implications for Advisors
If BofA’s outlook holds, the investment narrative shifts from defense to offense. Advisors may want to reassess underweights in pro-cyclical sectors and real assets, while also keeping an eye on quality growth names benefitting from AI-linked capex.
Fixed income allocation may require greater nuance. Falling spreads and upward pressure on nominal growth could support shorter-duration credit over longer-term Treasuries. Advisors may also want to revisit inflation-sensitive strategies—including TIPS and real asset ETFs—if above-trend inflation persists as part of a “boom” regime.
Ultimately, BofA’s call is a reminder that stagflation isn't destiny. In fact, the next phase of the cycle could favor advisors and clients willing to lean into selective risk.
