3 reasons BofA sees the US economy avoiding a worst-case scenario-brfastnews

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2025-07-29

3 reasons BofA sees the US economy avoiding a worst-case scenario

trader nyse celebrate cheer — Getty Images / Scott Olson

Bank of America thinks the global economy is leaning away from the worst-case scenario: stagflation.
Factors like Trump’s policies & AI investment could support an economic boom instead, the bank said.
Stagflation, where inflation rises while growth slows, is thought to be even harder to remedy than a recession.

The US economy may have successfully steered clear of a dire outcome many observers were warning of just a few months ago.

That’s according to analysts at Bank of America, who said they believe the US economy could be more on track for a cyclical boom rather than an episode of stagflation, a nightmare situation in which inflation rises while economic growth slows.

Stagflation is commonly thought of as even worse than a typical recession, as policymakers are prevented from cutting interest rates to boost the economy.

For a while, that scenario was one of the biggest fears on investors’ minds as they weighed the impact of Donald Trump’s “Liberation Day” tariffs.

But strategists said they think the economy is now leaning away from such a situation, even as many global fund managers surveyed by the bank said in June that they thought the global economy would slip into stagflation over the next 12 months.

Chart showing BofA's fund manager survey results for 12-month outlook for the global economy — Most fund managers said they expected the global economy to see stagflation over the next 12 months.BofA Global Fund Manager Survey

“The latest fund manager survey shows a small increase in investors expecting a Boom rather than the base case of Stagflation,” analysts wrote, defining a “boom” as above-trend economic growth and above-trend inflation.

“We agree with this building minority, and present below corroboration from our quantitative work,” they added.

Here are three reasons the bank sees stagflation risk fading.

trump signing budget bill — President Donald Trump signed his new spending plan into law July 4, reducing Medicaid spending.Pool/Getty Images

President Donald Trump’s America-first economic agenda is expected to act as a tailwind to the US economy, BofA strategists said.

The bank pointed to stimulus measures included in Trump’s “Big Beautiful Bill,” as well as the push to boost activity in US manufacturing.

“Moreover, with mid-term elections a few quarters away, it behooves the current administration to implement pro-growth policy now,” the bank’s strategists added.

Nvidia CEO Jensen Huang attends a round table discussion at the Viva Technology conference dedicated to innovation and startups at Porte de Versailles exhibition center in Paris, France, June 11, 2025. — Continued spending on AI has boosted mega-cap tech stocks, including Nvidia.Sarah Meyssonnier/REUTERS

Companies and the public sector are spending big on artificial intelligence, infrastructure, and manufacturing, BofA said.

For AI in particular, analysts said they were expecting $700 billion in capex from the so-called hyperscalers through 2025 and 2026, with “upward revisions each quarter.”

“The number of companies outside of the US planning to expand manufacturing capacity in the US continues to increase. Municipalities have also refocused on infrastructure with aged capital stock fraying as domestic activity increases,” they added.

Chart showing BofA's US Regime Indicator — The US Regime Indicator remained in a downturn in June. Downturns are typically followed by a phase of economic recovery, BofA strategists said.BofA US Equity & Quant Strategy, LSEG Data & Analytics, ICE Data Indices, LLC, Institute for Supply Management, Bureau of Labor Statistics, Federal Reserve

Bank of America’s US Regime Indicator, a gauge for where the US currently is in the business cycle, looks to be “on the brink” of an economic recovery, analysts said.

The US Regime Indicator ticked lower in June, which indicates that the economy is still in a “downturn” phase. Downturn phases are typically followed by economic recovery phases, the bank suggested.

Chart showing US regime phases in BofA's Regime Indicator — Downturns, or phase 4, are typically followed by recoveries, BofA strategists suggested.BofA US Equity & US Quant Strategy

The US Regime Indicator saw six inputs from the economy improve last month, strategists noted, which also suggests that the economy could soon be on the uptrend. Here were the six positive changes analysts saw:

Earnings per share revisions. Earnings revision breadth bottomed out around -25% in April, according to Morgan Stanley data. Since then, it’s improved to -5%, the bank said in a June note, implying that the market is growing more optimistic on corporate earnings.
GDP forecasts. Despite a contraction in the first quarter, real GDP was projected to expand 2.8% year-over-year in the second-quarter, according to advanced estimates from the Commerce Department.
Manufacturing strength. The Institute for Supply Management’s Production Index, one measure of activity in manufacturing, rose to 50.3 in June, which signals that production moved into expansionary territory.
Leading Economic Indicators. A collection of economic indicators showed signs of improvement on a year-over-year basis, BofA said.
Capacity Utility. The use of “installed productive capacity” in the goods and services sector also improved on a year-over-year basis, strategists added.
High-yield credit spreads. Credit spreads—which is the yield paid over a benchmark—have narrowed, which signals higher investor confidence and lower levels of financial stress among companies.