[Music plays through opening animation of a telescope pointing into the sky at dusk]
On screen copy:
2026 Year Ahead Outlook
Expert views on equities and the economy
On screen disclosures:
Please read important information at the end of this program. Recorded on 12/1/2025.
[Chris Hyzy speaking directly into the camera.]
Chris Hyzy:
At a time of falling interest rates and heavy investment in technology infrastructure, the U.S. economy looks poised for a new phase of growth in 2026. Yet risks still remain. A cooling labor market, persistent inflation and concerns about stretched equity valuations, including a potential AI bubble, could spark volatility. Where are markets headed next year? Which sectors are best positioned, and what's ahead for jobs, prices and consumer spending?
On screen copy:
Chris Hyzy
Chief Investment Officer
Merrill and Bank of America Private Bank
Chris Hyzy:
I'm Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. In this Outlook '26 program, I'll speak with Savita Subramanian, head of U.S. Equity and Quantitative Strategy, and Aditya Bhave, senior U.S. Economist, at BofA Global Research, for insights on these questions and the broader forces reshaping the economy for the long term.
[The screen transitions to Chris Hyzy, Savita Subramanian and Aditya Bhave sitting at a table engaged in discussion.]
Aditya, Savita, welcome. We're going to start big picture. We're going to start with the U.S. economy. Let's talk about the drivers, some surprises we may see in 2026 relative to '25, and then your overall view as it relates to the growth level.
On screen copy:
Aditya Bhave
Senior U.S. Economist
BofA Global Research
Aditya Bhave:
Thanks Chris. So we see five tailwinds to U.S. GDP growth next year.
On screen copy:
2026 U.S. economy
5 tailwinds for potential growth
- Fiscal policy lift of 0.3-0.4% to GDP
- Fed funds rate down to ~3% by year-end
- Trade policy contributes stimulus
- AI investment momentum
- Base effect from Q4 2025 shutdown
Aditya Bhave:
The first one is fiscal policy. So the Big Beautiful Bill for our estimates adds three to four tenths of a percent of GDP to FY '26 growth compared to a relatively flat fiscal impulse in FY '25. Second, monetary policy: the Fed has already cut by 50 basis points; another 25 basis points at the December meeting. So we're looking for two more cuts next year. But importantly, we don't think that they'll happen under Chair Powell. We aren't convinced that the Fed really needs to cut any further. With a new Fed chair will come, in our view, a more dovish leaning. And we think that they'll be able to get the committee onboard to do another 50 basis points of cuts, which will get the policy rate to around 3%. But it's going to be very hard to go lower than that.
Third, trade policy, we think, will be more supportive for growth next year. And interestingly, we think that whether or not the Supreme Court overturns the IEEPA tariffs. Fourth, AI-related investment, at least in the first half of next year, should keep up its strong momentum, particularly in light of what I said earlier about the Big Beautiful Bill and the tax incentives that have been worked into that.
And then last, just very mechanically, the shutdown being in the fourth quarter of this year — that creates a favorable base effect for GDP growth next year. But all of that. Putting all of that together, we land at a 2.4% growth forecast for next year, which is above consensus. But we think when the U.S. economy typically grows, it grows well above 2%.
Chris Hyzy:
Let's shift now to the broader equity markets, Savita.
Savita Subramanian:
Yep.
Chris Hyzy:
You had a very constructive forecast for 2025. And as we end this year, it looks right in line with the trend that you had expected throughout the year, post tariff April.
Savita Subramanian:
Right.
Chris Hyzy:
Describe your outlook broadly speaking for 2026.
On screen copy:
Savita Subramanian
Head of U.S. Equity and Quantitative Strategy
BofA Global Research
Savita Subramanian:
Yeah. So I think 2026 is the year where you still want to be invested in U.S. stocks, but maybe more selectively. We're forecasting really strong earnings growth and very strong profits recovery, something like, you know, close to 15% profits growth, which is double the normal run rate. But typically in years where you see profits run hot, the market doesn't actually do as well.
On screen copy:
BofA Global Research
2026 S&P 500 year-end target: 7,100
Projections as of Dec. 1, 2025.
Savita Subramanian:
So I think next year earnings are going to do most of the work for the S&P 500. And we're actually forecasting a year-end target of about 7,100, which would imply, you know, kind of mid-single-digit returns. Not as exciting as what we've enjoyed for the last few years, but still, you know, lots of pockets for real strong upside.
Chris Hyzy:
We are starting to call this a proud bull versus a stampeding bull. To your point about getting back to a more normal returns versus, what, '23, '24 and '25? Right. But what are the actual drivers, in your opinion, underneath the market to get to that more normal return level?
Savita Subramanian:
Yeah, I think one of the drivers is something Aditya alluded to, which is just really strong business investment, and we haven't really seen that in a long time. And I think we're just getting used to the idea that you can have something besides the consumer drive the economy. So I think that's going to be one of the missing links that we haven't really seen over the last 20 years kicking back in and driving stocks higher.
On screen copy:
Potential moves to consider
• Look at companies receiving capital — not spending or borrowing it
Savita Subramanian:
What we've found in CapEx cycles is you usually want to buy the companies that are getting the money, not the ones that are spending the money. We're still bullish on the AI theme, but we're less enthusiastic about the companies that are actually spending the money, borrowing to spend, etc.
On screen copy:
Potential moves to consider
• Seek exposure to companies benefiting from the productivity cycle
Savita Subramanian:
I think there's also another cross current here, which we also haven't seen in a while, which is a productivity cycle. And that really kicked in after Covid with labor inflation. You don't even need AI to see productivity. In the last few years, we've seen a lot of companies just exert automation, efficiency, other techniques for driving a productivity cycle. Now we have AI, which I think could be transformative for some sectors.
From a sector perspective, if the Fed is cutting and, you know, potentially stimulating consumption, I think that could actually provide an offset to some of the pain that that lower-income consumer has been feeling.
On screen copy:
Potential moves to consider
• Target sectors benefitting from lower interest rates
Savita Subramanian:
So what we've found during periods of fed cutting cycles is that consumer staples companies, you know, lower price point retailers tend to outperform the market quite aggressively. And that would be a big change from the last few years where consumer staples and food stocks were suffering more from inflation. The lower-income consumer was feeling the more acute pinch of inflation in rent, utilities, insurance, you know, food, etc.
I think also as we move into the midterm elections of next year, we could see more friendly, populist policy rather than the more trade-focused, potentially inflationary policy of this year. So those could be really positive drivers for a comeback in that broader consumption story.
Chris Hyzy:
Let's talk a little bit about some of the risks or some of the worries out there as 2026 comes to be.
Aditya Bhave:
Right. So I think the most proximate concern about the U.S. economy right now is that we have this really interesting dichotomy between the soft labor data that you alluded to and the strength of the consumer. And it's kind of like we're balanced on a knife edge, and we have to figure out which way it's going to tip. We are betting on the idea that the consumer will eventually win this fight, in the sense that the consumer will stabilize the labor market. The strength in consumer spending, particularly services spending in the last few months.
Chris Hyzy:
Resiliency again.
Aditya Bhave:
Exactly. Our expectation is that that will stabilize the labor market. And related to that, our base case is that a lot of the softness we've seen in the labor market is related to changes in immigration policy, which tend to lower the break-even rate of job growth, kind of the underlying rate of job growth in the economy. But if we're wrong, and we're misreading the labor market right now, things could get a lot worse very soon. And the risk is really around the next few months.
On screen copy:
Possible signs of trouble for U.S. economy
- Consecutive monthly rise in unemployment rate
- Impacts of possible market downturn
Aditya Bhave:
So if you see the unemployment rate increasing by a tenth or more every month for the next four, five months, then I think we would be much more concerned about the economy. The other risk, obviously, is something that you mentioned earlier, a bubble in the markets. If you have some sort of major downturn in equities, credit — I'm sure Savita has much more intelligent stuff to say about this than I do — but that could be concerning because of the risks that it poses to the consumer. The idea that the consumer has been somewhat K-shaped; higher-income spending has been driven by equity market wealth effects. If that breaks and if it breaks in a manner that's sustained, then again, I would be more concerned about the outlook.
Chris Hyzy:
Perspective on inflation. If last year or if 2025 I should say was worries over stagflation, what are we thinking about the inflation backdrop for '26? And is it a difficult atmosphere when you're at 2.5% to 3% inflation versus getting back to the Fed target of 2%?
Aditya Bhave:
Right. So our view throughout this year has been that the discussion around tariffs — how much will they impact inflation? When will that impact show up? Will it be one-off or not — it's taken the oxygen out of the room from the conversation that we thought was potentially more important, which is where is underlying inflation? We've been saying since well before the tariffs went into place that, hey, underlying inflation looks kind of stuck, and it looks stuck around 2.5%.
And that in our view is still the case. Maybe you can say it's 2.3% but it's probably not lower than that. So we're stuck above target. And there's a discussion that's starting among some of the more hawkish folks at the Fed that particularly services, you know, discretionary services, demand-driven inflation, that might be picking up a little bit again.
So if that continues into next year, and certainly if you get the kind of demand stimulus that we're expecting, then I think that's going to be the conversation next year. Not supply-driven tariff inflation, but demand-driven services inflation. And if that keeps you at 2.8%, as in our forecast, I think that's quite worrying for the Fed. But at the same time, you might have a Fed that for political reasons finds it quite difficult to raise rates.
So rates are stuck at 3% and inflation is also stuck at almost 3%. So your real rate is almost zero. Which is problematic, because then how do you get back to target?
Chris Hyzy:
Especially if the affordability issue is still front and center?
Aditya Bhave:
Yep.
Chris Hyzy:
Overall, for the backdrop.
Aditya Bhave:
Yep. Yep.
Chris Hyzy:
I want to thank you both for joining me today. Savita, Aditya, thanks again.
Aditya Bhave:
Thank you.
Savita Subramanian:
Thanks.
[The panel of Chris Hyzy, Savita Subramanian and Aditya Bhave transitions to a single shot of Chris Hyzy speaking directly into the camera.]
Chris Hyzy:
We hope these insights help you as you chart your investing course for the months and years ahead. Our outlook for potential long-term growth as technology transforms industries and drives historic infrastructure buildouts remains optimistic. But be mindful of risks, from adverse economic news to unexpected geopolitical events that can create periodic, even severe volatility.
We recommend a balanced, diversified portfolio built for your long-term goals. If you work with an advisor, consider asking how the ideas you've heard today might fit into your strategy. And check back here throughout 2026 for updates as conditions and opportunities evolve. Thanks for watching.
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[End of transcript]
"At a time of falling interest rates and heavy investment in technology infrastructure," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, "the U.S. economy looks poised for a new phase of growth." That optimistic view of what's ahead in 2026 rests on a balance of both potential bright spots and risks, from fiscal stimulus and a more dovish Federal Reserve to a cooling labor market, the continuing creep of prices and worries over a market bubble tied to artificial intelligence (AI).
In the video above, Hyzy sits down with top analysts from BofA Global Research to help make sense of the year ahead for equity markets and the U.S. economy. "We see five tailwinds to U.S. GDP growth next year," observes Aditya Bhave, senior U.S. economist at BofA Global Research.