Traders anticipated a a lot easier economic system by now.
Inflation was anticipated to maintain easing, customers had been anticipated to bend beneath larger costs, and the following huge Fed debate was presupposed to be about when fee cuts may start.
Nonetheless, Financial institution of America is not telling that story.
The financial institution sees an economic system that also has sufficient momentum to keep away from a traditional downturn. In line with its mid-year outlook shared with me, spending ranges held up, the labor market hasn’t cracked, and progress stays alive and effectively.
However, that resilience just isn’t spreading evenly, and that is the uncomfortable twist.
The U.S. economic system is perhaps robust within the locations that matter for inflation however fragile within the locations that matter most to households.
That beckons a more durable query: What occurs when the economic system is simply too scorching for aid, however too uneven to name wholesome?
What Financial institution of America stated about America’s two economies
Maybe BofA’s most putting financial name is that the U.S. is actually operating on a few completely different tracks.
In its midyear outlook, the financial institution described the economic system as Ok-shaped, calling it “reflation for larger revenue, stagflation for decrease revenue.”
Wealthier households proceed to spend at a powerful tempo, led by stronger steadiness sheets, asset positive aspects, higher job safety, and publicity to a market that is spearheaded by earnings power and AI funding.
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Conversely, lower-income households proceed to soak up the more durable aspect of the cycle, with sticky costs, larger borrowing prices, and renewed fuel stress.
The cut up is obvious in BofA’s card information.
For the week of June 6, lower-income spending was up 5.5% 12 months over 12 months, whereas higher-income spending rose 6.1%.
However the hole will get a lot wider on the high: Spending by the high 5% rose 7.8%, whereas spending by the high 1% jumped 9.0%. On Might 30, lower-income spending rose 4.0%, in contrast with 7.6% for the highest 5% and 8.6% for the highest 1%.
Merely put, the patron just isn’t universally sturdy, and the strongest households are merely robust sufficient to maintain the combination information wanting wholesome.
Financial institution of America warns America’s resilient economic system is masking a widening shopper divide.John Lamparski/Getty Photos
Why the Fed could must make the ache worse
Maybe essentially the most uncomfortable a part of BofA’s outlook is that the economic system hasn’t weakened sufficient to justify aid.
The truth is, it appears robust sufficient to create a brand new fee downside.
BofA sees actual GDP rising 2.3% in 2026, with the unemployment fee holding close to 4.3%. The identical forecast, although, has PCE inflation at 3.5% and core PCE at 3.3%, leaving inflation effectively above the Fed’s goal, whilst progress retains shifting.
So the problem is that progress is much from cracking, whereas labor is not breaking both, with sticky inflation nonetheless enjoying an enormous position.
Talking of labor, in contrast with final Might, the unemployment fee is flat, core PCE is up 70 foundation factors, and the coverage fee is 75 foundation factors decrease. Consequently, the financial institution expects 75 foundation factors of fee hikes this 12 months, as I lined just lately.
On high of that, the inflation threat is even deeper than one scorching print.
BofA argues that inflation continues to be “caught above goal,” with underlying measures additionally holding above 2%. Companies demand continues to be propping up inflation, whereas tariffs have revived the relentless supply-driven stress on items.
The Fed might need to tighten as a result of the elements of the economic system that’ve held up proceed preserving inflation scorching, even when the weak elements really feel squeezed.
AI is holding up progress, nevertheless it brings its personal shock
Financial institution of America argues AI has turn into greater than a easy tech-stock commerce.
In its midyear outlook, the financial institution argues that booming AI-related elements have primarily turn into a demand shock for the broader economic system.
For perspective, AI spending is now not simply lifting the likes of Nvidia, cloud shares, or the Magnificent 7. It’s also serving to to assist U.S. progress.
To again that argument up with some information, Enterprise Insider, citing Goldman Sachs, states the 2026 AI capex for the 4 may hit $725 billion, roughly double 2025’s tally.
Furthermore, the 4 main AI spenders lifted Q2 2026 capital spending by 74% 12 months over 12 months to $168 billion, exhibiting the AI buildout continues to be shifting at breakneck velocity, whilst buyers query returns.
BofA estimates AI funding will add 0.4 proportion level to GDP progress this 12 months, whereas AI funding adjusted for imports rises to 0.7% of GDP in 2026.
In a cut up economic system, that could be a huge cushion. Customers proceed to place within the work, however AI capex can be turning into a significant engine of home demand.
BofA says the affect on jobs is already seen in white-collar providers, whereas the productiveness payoff stays an open query.
Furthermore, that situation additionally ties again to inventory market threat. If BofA is correct on Fed hikes, rate-sensitive corporations may really feel much more stress.
The truth is, the report says half of small-cap debt is short-term or floating fee, whereas a 75-basis-point climbing cycle may raise Russell 2000 ex-financials internet curiosity expense by 13% of 2025 EBIT in 2027.
