Must Read Research
January 25, 2026
Candace Browning, Head of BofA Global Research
"The time to repair the roof is when the sun is shining." Fund managers' expectations for equities and the economy are far from icy, so it may be time to warm up to some hedges. Defense offers visibility and growth, but it's a year of big change, and the blizzard of AI capex is underway, but moderating.
Investors are the most bullish they've been since July 2021, according to the January Fund Manager Survey.
Cash levels are at a record-low 3.2% and the percentage of respondents expecting a boom in the next 12 months is 34%, the highest since the heady post-COVID days of 2021. There was a notable downward inflection in rate-cut optimism from respondents, but liquidity conditions are still perceived to be the best in years. Chief Investment Strategist Michael Hartnett suggests that long cash and bonds / short commodities and stocks, and long UK stocks / short Emerging Markets, are among the contrarian trades. Protection against an equity correction is the lowest since January 2018, suggesting it's time to do just that — increase hedges and exposure to safe havens. The U.S. Equity Strategy team has a similarly cautious message, showing that stocks anticipate recoveries and that backdrops with strong earnings and GDP (gross domestic product) growth typically translate to the weakest returns.
This should be another year of big growth for defense spending.
For both commercial aerospace and defense contractors, however, tolerance for delays and missteps has dwindled. We expect the best-performing companies in 2026 will be those that can adapt most quickly, successfully utilize and integrate AI, automate at scale, and execute. We see $371 billion of incremental defense spending, about 70% above 2024 levels, if all NATO members (ex-U.S.) were to spend 3.5% of GDP (gross domestic product) on core defense. NATO members pledged to spend 5% of GDP by 2035 at the June NATO summit. Europe will need to balance the desire to invest in its own defense industrial base, with near-term demand for equipment, but the aforementioned companies are well placed, having existing European footprints.
After an AI-fueled 140% rally over the last year, hyperscaler capex growth is expected to slow to 39% in 2026 from 68% in 2025.
In Tal Liani’s view, enterprises aren't yet ready for agentic AI, with data readiness and controls needing to catch up. Agentic AI is a key factor for continued network investments.
Claudio Irigoyen, Head of Global Economics, BofA Global Research
Geopolitics takes over Davos
While it is too early to tell, the current geopolitical order may be evolving significantly. Traditional U.S. allies like Canada seem to be considering a diversification and risk management strategy for U.S. relations. In our view, amid higher geopolitical tensions, influence over strategic resources and geographies, especially choke points, is at stake. Greenland tariffs were suspended, and the use of force is off the table. But high uncertainty clouds the outlook, from pending Supreme Court rulings on IEEPA (International Emergency Economic Powers Act) and Cook, to Trump's pick for the next Fed chair.
Winter Storm Fern is likely to be a substantial drag on 1Q growth
To assess the economic impact of Winter Storm Fern, we look back at Winter Storm Viola, which hit the U.S. in February 2021. Accounting for a pickup in Bank of America card spending growth in the weeks after the storm, we estimate that at least 0.6 percentage points of spending was lost over a one-month period due to Viola. Some output will be permanently lost due to Winter Storm Fern. However, we wouldn't expect any lasting impact on the trajectory of the economy. This means there is as much upside to 2Q GDP growth as there is downside to 1Q. We remain bullish.
