BCA Macro Outlook: How Much Longer Can US Stocks Rally? AI Investment Cycle May Be Only Two-Thirds Complete

TL;DR

· BCA believes the recent three rounds of US Treasury sell-offs were mainly triggered by uncertainty over US fiscal, trade, and foreign policy, not by a sudden deterioration in economic fundamentals or Fed policy.

· The US economy remains in a strong expansion phase, with corporate profits rather than valuation expansion serving as the main support for the current stock market rally, so it is too early to turn broadly bearish.

· AI capital spending may still have 3 to 5 years of expansion ahead; even if competition among frontier large models intensifies, falling inference costs could actually expand computing demand.

· The Strait of Hormuz has not been completely disrupted, and crude oil shipments are recovering, but low refined product inventories and high crack spreads mean energy pressures have not fully dissipated.

· The Russia-Ukraine conflict is the more concerning geopolitical risk at present; Ukrainian drone operations are breaking the previous equilibrium, and Russia may escalate with hybrid warfare or energy countermeasures.

· The US's relative growth advantage in recent years has largely come from fiscal expansion; as the political environment shifts toward fiscal restraint, the US growth advantage over other economies may narrow.

· BCA favors the long-term trade of "buying markets outside the US," but this does not mean selling all US assets, nor does it imply the dollar will quickly lose its reserve currency status.

· The 2020s remain a capital spending cycle favoring commodities and real assets; only when global capacity becomes excessive in the 2030s will inflation likely turn downward again.

Bonds Are Trading "Sentiment," Economic Fundamentals Have Not Clearly Deteriorated

BCA's core assessment of the current market is that US stocks reflect strong growth, while US Treasuries are trading on policy sentiment from the White House.

Over the past two years, the US bond market has experienced three distinct sell-offs. The first occurred around the 2024 US election, when investors worried that Trump's return to power would further widen the fiscal deficit; the second came after the "Liberation Day" tariff announcement, when markets feared that excessively high tariffs would hurt both growth and fiscal revenue; the third was related to uncertainty over US policy toward Iran.

In BCA's view, the common catalyst for all three adjustments was political or geopolitical conflict, not an economic recession, a renewed loss of inflation control, or a sudden hawkish turn by the Fed. Foreign holdings of US Treasuries have remained broadly stable, and neither China nor Japan has shown signs of large-scale selling, so there is currently no clear global "flight from US Treasuries."

Increased bond supply does create some pressure, especially as AI companies expand financing and corporate bond issuance grows rapidly, but this alone cannot explain the rise in yields. More importantly, US nominal and real economic growth rates remain above the 10-year Treasury yield, household leverage is low, and corporate financing activity has not clearly frozen. Current interest rates are not yet high enough to end the economic expansion.

BCA therefore expects that if US policy toward Iran is gradually led by officials more focused on market stability, such as Treasury Secretary Bessent, the geopolitical risk premium may decline, and the room for further sharp increases in Treasury yields is relatively limited.

AI Capital Spending Has Not Reached Its Endpoint

AI capital spending is one of the key supports for the continued resilience of the US economy. In the first quarter of 2026, software and hardware investment contributed 0.8 percentage points to quarterly US real GDP growth, the highest level this century. However, compared with the information technology investment cycle of the 1990s, the current intensity of capital spending has only just approached that period's level.

Based on this, BCA judges that the AI capital spending cycle may still have 3 to 5 years to run, rather than being near its end.

This judgment is not based on the assumption that "all large models will eventually earn high profits." The report puts forward a seemingly paradoxical view: even if the business models of frontier large models come under pressure, underlying computing investment may continue to expand.

Open-source models and price competition will lower the cost of using AI, hurting the profit margins of some model companies, but will also enable more enterprises to deploy AI. In other words, falling model prices may, through demand elasticity, lead to greater computing volume and data center demand. Whether large model companies make money is not exactly the same question as whether investment in chips, electricity, and data centers can continue to grow.

The proportion of enterprises adopting AI is still rising, and data centers are beginning to prove their commercial viability. At the same time, electricity demand has resumed growth after years of stagnation, indicating that AI investment is already having an observable impact on the real economy.

BCA acknowledges that every round of technology investment eventually leads to overbuilding, as happened with railways, the internet, and telecom infrastructure. But if this cycle is compared with the 1990s, AI capital spending may be only about two-thirds complete. Even if the market has entered the latter half, exiting too early could still mean missing the most concentrated gains of the final stage.

The inflection point truly worth watching may be a wave of large tech company IPOs. Historically, very large IPOs often signal a rapid increase in equity supply and have repeatedly coincided with cyclical peaks. If global central banks tighten liquidity at the same time, a wave of large IPOs could become a clearer risk signal.

US Stocks Still Have Fundamental Support, but Risks Are External

BCA maintains its tactical optimism on equities. The US economy is growing strongly, global liquidity remains relatively ample, and private sector leverage is not high. The current stock market rally is driven mainly by corporate earnings growth, not entirely by valuation multiple expansion, so it is not exactly the same as the late-1990s bubble phase.

Inflation also does not yet pose a major threat. As long as energy prices do not sustainably break out of their current range, inflationary pressures have likely peaked. US labor market models are strengthening and may push up wages in the future, but BCA sees this as more of a 2027 risk than a variable that needs to be traded immediately.

At the same time, US consumer willingness to spend remains strong. The market has long expected the savings rate to rebound, but household consumption attitudes may have undergone a structural change, and the savings rate may not recover according to traditional models. This means consumption can still support growth, but it also means household buffers are shrinking.

The report also views China's fiscal expansion as a potential "positive black swan." Local government bond issuance is behind schedule, and investment growth has slowed markedly, which may force the central government to step up support around the October Politburo meeting. If policy measures exceed market expectations, it would benefit Chinese assets, global manufacturing, and commodity demand simultaneously.

Hormuz Risk Is Declining, but Refined Product Pressures Remain

BCA believes the market tends to focus on the absolute level of geopolitical risk while ignoring the direction of change. When a conflict remains severe but the pace of deterioration begins to slow, risk assets have often already bottomed and started to rebound.

The Strait of Hormuz illustrates this shift. According to shipping information obtained by BCA, vessels are still able to pass through the strait, but transport costs have risen from about $1 under normal conditions to $12-15. Trade flows, US commercial crude inventories, and Chinese import data also show that crude oil is still crossing the strait, and the degree of supply disruption has eased.

This is gradually creating a new "dynamic equilibrium" in the Persian Gulf: localized military actions will continue to recur, but all parties are constrained by oil prices, domestic politics, and global energy demand, and are unwilling to truly cut off strait transit.

BCA even argues that at this stage, oil prices are not just a result of the conflict but also a constraint on it. When oil prices fall, the US and Iran have more room for military action; when oil prices rise to levels that could hit the global economy, all parties tend to pull back. Brent crude may thus form a new trading range around $85-100 per barrel.

However, the recovery of crude oil shipments does not mean the energy shock is over. Affected by both the Hormuz crisis and the Russia-Ukraine conflict, US refined product inventories remain low, and refinery crack spreads remain elevated. Gasoline and diesel prices may continue to act as a tax-like drag on household purchasing power and further influence the US midterm elections.

The Bigger Geopolitical Risk May Come from Russia

Compared with Iran, BCA is more concerned about a renewed escalation of the Russia-Ukraine conflict. Ukraine's expanded drone operations are breaking the battlefield equilibrium that had formed over the past three to four years and are directly affecting Russian energy exports and domestic political stability.

The report argues that the pressure the Russia-Ukraine conflict has placed on Russia's economy and society is already clearly higher than the relative burden the Vietnam War placed on the United States. If oil prices remain high, Russia will have more fiscal resources for war on the one hand, and on the other will judge that the West will find it harder to impose severe sanctions on its energy exports, which could increase its willingness to escalate further.

In the short term, Russia is likely to prioritize "deniable" methods, including drones, cyberattacks, sabotage of energy facilities, and other hybrid warfare tactics; but if domestic pressure continues to mount, actions could shift from covert to overt. European energy costs and Russian export facilities therefore become key indicators to watch in the coming months.

US Advantage Is Weakening, Capital Will Flow Back to the Rest of the World

The report's most important long-term judgment is to remain bullish on markets outside the US.

BCA stresses that this is not simply a "sell America" trade. The US will remain a major global economic and financial power, and the dollar will not suddenly lose its reserve currency status. But the weight of US assets in global portfolios is already too high, and as growth differentials and fiscal policies change, capital needs to rebalance.

2025 was an important signal: although the US remains at the center of AI investment, US assets underperformed other markets, and the dollar fell about 10% for the year. BCA believes this was not a coincidence but the beginning of a long-term trend.

The US growth advantage after the pandemic is often attributed to productivity gains, but the report argues that fiscal expansion was the more critical variable. The US deployed far more fiscal resources than other major economies during the pandemic, and that spending boosted economic output, corporate profits, and output per hour worked, while also supporting the outperformance of US equities relative to global markets.

Now that logic is reversing. The bond market has already sounded a warning about fiscal expansion, and US voter concerns about deficits and debt are approaching levels seen during the "Tea Party movement." The scale of fiscal expansion in Trump's second term is in fact clearly constrained, government spending has consistently been weaker than expected, and the fiscal impulse is flattening.

If the US no longer relies on large-scale fiscal spending to maintain its growth lead, its growth advantage over Europe, China, and other economies may narrow. Exchange rates and cross-border capital flows typically follow relative growth changes, which would weaken the foundation for the dollar and US assets to outperform global markets over the long term.

The 2020s Still Belong to Commodities and Real Assets

BCA believes the world has entered a long-term capital spending cycle driven by multipolarity, supply chain restructuring, and national security spending.

Countries are redistributing supply chains away from a single center, reducing dependence on China, and expanding investment in defense, energy, manufacturing, and infrastructure. China is unlikely to be completely removed from global supply chains, but its centrality may decline. Building new production networks requires large amounts of factories, equipment, electricity, transportation, and raw materials, so this process is inherently commodity-intensive.

Reindustrialization is not happening only in the US. Europe has room to expand fiscal spending further, China has low financing costs, and pension funds and private capital in various countries can also be directed toward domestic investment. Economies outside the US are fully capable of expanding investment and consumption.

Therefore, BCA recommends that for the remainder of this decade, investors maintain a long-term overweight in commodities and other real assets, and reduce excessive concentration in expensive US financial assets. The report characterizes the 2020s as a decade of "building atoms, not just producing bytes": AI is certainly important, but data centers, power grids, energy, factories, and supply chain restructuring are the broader investment themes.

However, the capital spending cycle will eventually lead to excess. When the world has built sufficient new capacity in the 2030s, inflation may turn downward again. At that point, today's relatively high bond yields may offer attractive allocation opportunities for long-term investors.

Overall, BCA's portfolio approach can be summarized as: in the short term, continue to hold risk assets and earn bond yields; in the medium to long term, increase allocations to markets outside the US, commodities, and real assets; while remaining alert to cyclical turning points triggered by large tech IPOs, tightening global liquidity, and escalation of the Russia-Ukraine conflict.