Must Read Research
January 11, 2026
Candace Browning, Head of BofA Global Research
New Year’s resolutions often force an honest assessment of what’s sustainable and what isn’t. In that spirit, we look at the limits of growth-at-all-costs investing, the accelerating transformation of U.S. defense strategy, short-term benefits and long-term realities following events in Venezuela, and how a ceiling on casualization can affect sportswear.
After a decade of weak top-line growth, investors have come to treat sales growth as the primary driver of stock performance.
Head of U.S. Equity Strategy Savita Subramanian warns that growth achieved at the cost of efficiency is a fragile alpha source. She notes that while AI monetization remains uncertain, markets are still “Buying the Dream”. Hyperscalers’ capital intensity has surged from 13% in 2012 to 64% today, surpassing oil majors. The key metric to watch is the spread between return on incremental invested capital (ROIIC) and weighted average cost of capital (WACC), which will influence valuation sustainability. History warns against chasing sales alone: since 1986, top-decile sales-growth stocks have underperformed the S&P 500 by 23bps (basis points) annually, while high-ROIIC stocks consistently generated +1.6ppt (percentage points) of alpha. In today’s AI market, stock selection, not index exposure, matters most.
Commentary from our 18th Annual BofA Defense Outlook Forum highlighted a rapid transformation in U.S. defense strategy and spending.
A potential FY27 (fiscal year) $1.5 trillion defense budget — nearly 4% of GDP (gross domestic product) and implying ~50% year-over-year growth — would mark a step-change for the sector. The Department of War is accelerating its push toward automation, autonomy, and AI, with U.S. private companies projected to invest $400 billion in AI infrastructure in 2026 alone — surpassing the present value cost of the Apollo program. Space has also emerged as a critical warfighting domain: 15 nations now have orbital access, and 88 spacecraft are in orbit, following decades of a U.S. monopoly. At the same time, competition among primes and new entrants in unmanned surface and underwater systems is intensifying. Our Naval panelists emphasized that multiple players are likely to contribute to a future Golden Fleet, signaling a defense ecosystem increasingly focused on speed, flexibility, and innovation to sustain global advantage.
This week, we hosted several calls on Venezuela, including one featuring BofA Global Research experts across asset classes.
Head of Global Commodities Research Francisco Blanch believes that the front end of the oil curve will be supported by China increasing its strategic reserve purchases, while longer-dated crude may be pressured by rising supply. However, increased supply benefits Gulf Coast refiners, which can earn higher margins on the heavy Venezuelan crude now headed to the U.S., according to Integrateds, Refining, and Midstream Analyst Jean Ann Salisbury. Significant jumps in production of 2–3x current levels, will take a while. Besides the legal protections and the $10 billion in annual oil investment that may be needed, our experts highlight other production hurdles, including existing oil contracts and infrastructure needs, ranging from pipelines to electricity and water. The recent establishment of Contracts for Productive Participation (CPPs) could serve as a useful framework to encourage investment today.
The European sporting goods sector enters 2026 in a prolonged slump, confirming a structural slowdown from its historic 9% growth to just 4–5% estimated, following a weak 1% in 2025.
European Discretionary Analyst Thierry Cota highlights structural headwinds: the 20-year casualization trend is largely complete (sneakers are now ~50% of global footwear sales), sports participation has stagnated (U.S. accounts for >40% of sector sales, but time spent on sports is flat at ~30 mins/day), and retail penetration is limited at 43% of sales. Inventory levels remain elevated, consumer demand is soft across the U.S. and China, and supplier growth has stalled.
Claudio Irigoyen, Head of Global Economics, BofA Global Research
In search of the next theme
As usual at the beginning of the year, investors struggle to determine which theme will be the dominant one in the near future. Recent news on Venezuela sparked a lot of attention but little is known beyond Trump's intention to indirectly run the country for the indefinite future while boosting oil production with American companies. Potential geopolitical implications of this move are all over the place, which in a nutshell increased the relevance of geopolitical risks for asset pricing. Not surprisingly, gold is king.
Beyond geopolitics, many puzzles remain unsolved. Will the K-shaped consumption in the U.S. be sustainable? Is the AI story a bubble? Will China continue exporting goods deflation to the rest of the world? Is the U.S. fiscal deficit sustainable? How will the Supreme Court ruling on IEEPA (International Emergency Economic Powers Act) impact the future of tariffs? Will the Fed keep its independence at bay? Where will growth come from in Europe?
Supreme Court ruling on IEEPA: upside risks to the fiscal deficit
In our Year Ahead report, we argued that fiscal policy will be stimulative in 2026, with an estimated fiscal impulse circa 0.4pp of GDP (gross domestic product) and a fiscal deficit (headline) close to 6% of GDP (gross domestic product). This fiscal impulse will be reinforced by easy financial conditions validated by the Fed, though we don't expect more cuts before the change in the Fed's leadership.
In our forecasts, we penciled in 1.5pp of GDP in terms of revenues from tariffs, assuming 15% effective tariffs, 70% of which comes under IEEPA. In practice, tariff revenues will likely be closer to 1pp (percentage points) of GDP.
An adverse SCOTUS ruling on IEEPA this week could trigger a sequence of events that includes replacing affected tariffs with new tariffs invoking other sections but on net reducing tariff-related revenues by close to 0.3pp of GDP. Certainly, an upside risk to an already quite stretched fiscal deficit given the cyclical position of the U.S. economy.
