TL;DR

· BCA believes the recent three rounds of selloffs in US Treasuries were mainly triggered by uncertainties in US fiscal, trade, and foreign policy, rather than a sudden deterioration in economic fundamentals or Federal Reserve policy.

· The US economy remains in a relatively strong expansion phase, with corporate profits rather than valuation expansion forming the main support for this round of US equity gains, and it is premature to turn fully bearish for now.

· AI capital expenditure may still have 3 to 5 years of expansion room, and even as competition among frontier large models intensifies, falling inference costs may instead expand computing power demand.

· The Strait of Hormuz has not been completely disrupted, and crude oil transportation is recovering, but refined product inventories remain low and cracking spreads are elevated, meaning energy pressures have not fully subsided.

· The Russia-Ukraine conflict is the geopolitical risk more worthy of vigilance at present, as Ukraine's drone operations are breaking the original equilibrium, and Russia may intensify hybrid warfare or retaliate on the energy front.

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

· BCA is bullish on the long-term trade of "buying markets outside the US," but this does not equate to a full-scale selloff of US assets, nor does it mean the dollar will quickly lose its reserve currency status.

· The 2020s remain a capital expenditure cycle in which commodities and real assets are favored; only after global production capacity gradually becomes excessive in the 2030s may inflation shift back to a downward trend.

Bonds are trading "sentiment," while economic fundamentals have not clearly deteriorated

BCA's core judgment on the current market is this: US equities reflect strong growth, while US Treasuries are trading policy sentiment from the White House.

Over the past two years, the US bond market has experienced three notable selloffs. 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 appeared after the announcement of "Liberation Day" tariff policy, when the market feared that excessively high tariffs would damage both growth and fiscal revenue; the third was related to uncertainty over US policy toward Iran.

In BCA's view, the common catalyst for these three adjustments was political or geopolitical conflict, not recession, inflation spiraling out of control again, or a sudden hawkish turn by the Federal Reserve. The scale of US Treasuries held by foreign investors has remained broadly stable, and there have been no signs of large-scale selling by China or Japan, so there is currently no clear global "flight from US Treasuries."

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

BCA therefore expects that if U.S. policy toward Iran gradually comes to be dominated by officials such as Treasury Secretary Bessent who place greater emphasis on market stability, the geopolitical risk premium may decline, and the room for further significant increases in U.S. Treasury yields is relatively limited.

AI capital expenditure has not yet reached its endpoint

The U.S. economy's ability to maintain resilience is supported in part by AI capital expenditure. In the first quarter of 2026, software and hardware investment contributed 0.8 percentage points to U.S. real GDP quarterly growth, the highest level this century. However, compared with the information technology investment cycle of the 1990s, current capital expenditure intensity is only just approaching the levels of that period.

BCA accordingly judges that the AI capital expenditure cycle may still have 3 to 5 years to run, rather than being close to its endpoint.

This judgment is not based on the assumption that "all large models will ultimately earn high profits." The report puts forward a seemingly contradictory view: even if the business models of frontier large models come under pressure, underlying computing power investment may still 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, bring greater computing volume and data center demand. Whether large model companies make money and whether investment in chips, power, and data centers can continue to grow are not entirely the same question.

At present, 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 is growing again after years of stagnation, indicating that AI investment has already had an observable impact on the real economy.

BCA acknowledges that every round of technology investment ultimately experiences overbuilding, and railways, the internet, and telecommunications infrastructure have all gone through similar processes. But if this cycle is compared with the 1990s, AI capital expenditure may be only about two-thirds complete. Even if the market has entered the second half, exiting too early could still mean missing the most concentrated returns of the final stage.

The real inflection point worth watching may be a wave of intensive listings by large technology companies. Historically, massive IPOs have often meant a rapid increase in market equity supply and have repeatedly occurred near interim tops. If global central banks simultaneously tighten liquidity at that time, a wave of large IPOs could become a clearer risk signal.

US Stocks Still Have Fundamental Support, but Risks Come from Abroad

BCA continues to maintain a tactically optimistic view on equities. US economic growth is currently strong, global liquidity remains ample, and private-sector leverage is not high. This round of US stock gains is mainly driven by corporate earnings growth, rather than relying entirely on valuation multiple expansion, so it is not exactly the same as the bubble phase of the late 1990s.

Inflation also does not yet pose a major threat. As long as energy prices do not persistently break above their existing range, inflationary pressure has likely already peaked. US labor market models are strengthening and may push wages higher in the future, but BCA believes this is closer to a 2027 risk rather than a variable that needs to be traded immediately now.

At the same time, US household willingness to consume remains strong. The market has long expected the savings rate to rebound, but household attitudes toward consumption 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, while investment growth has slowed markedly, which may force the central government to increase support around the October Politburo meeting. If the policy intensity exceeds market expectations, it would benefit Chinese assets, global manufacturing, and commodity demand at the same time.

Hormuz Risk Declines, but Refined Product Pressure Remains

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

The Strait of Hormuz is reflecting this change. According to shipping information obtained by BCA, vessels can still pass through the strait, but transport costs have risen from about $1 under normal conditions to $12 to $15. Trade flows, US commercial crude inventories, and Chinese import data also show that crude oil is still moving through 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 still occur repeatedly, but all parties are constrained by oil prices, domestic politics, and global energy demand, and are unwilling to truly cut off shipping through the strait.

BCA even believes that at this stage, oil prices are not only the result of conflict, but also constrain the conflict in reverse. When oil prices fall, the United States and Iran have greater room for military action; when oil prices rise to a level that could shock the global economy, all parties instead pull back. Brent crude may thereby form a new trading range around $85 to $100 per barrel.

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

Greater geopolitical risks may come from Russia

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

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

In the short term, Russia may prioritize methods with "deniability," including drones, cyberattacks, sabotage of energy facilities and other hybrid warfare tactics; but if domestic pressure continues to rise, actions may also shift from covert to overt. Europe's energy costs and Russia's export facilities therefore become key indicators to watch in the coming months.

U.S. advantages are weakening, and capital will flow back to global markets

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

BCA stresses that this is not a simple "sell America" trade. The United States will remain the world's leading economic and financial power, and the dollar will not suddenly lose its reserve currency status. But U.S. assets already account for an excessively high weight in global portfolios, and as growth gaps and fiscal policy change, capital needs to be rebalanced.

2025 is an important signal: although the United States remains at the center of AI investment, U.S. assets underperformed other markets, and the dollar fell about 10% over the year. BCA believes this is not accidental, but the beginning of a long-term trend.

The United States' post-pandemic growth advantage is often explained as a productivity improvement, but the report argues that fiscal expansion is the more critical variable. The United States injected far more fiscal resources during the pandemic than other major economies, and these expenditures boosted economic output, corporate profits and output per hour worked, and also supported the performance of U.S. equities relative to global markets.

Now, this logic is reversing. The bond market has already issued warnings about fiscal expansion, and U.S. voters' concerns about deficits and debt are approaching those of the "Tea Party movement" era. The fiscal expansion in Trump's second term is in fact clearly constrained, government spending continues to fall short of expectations, and the fiscal impulse is flattening out.

If the United States no longer relies on large-scale fiscal spending to maintain its growth lead, its growth advantage over Europe, China, and other economies could narrow. Exchange rates and cross-border capital flows typically follow relative growth changes, which would weaken the foundation for the dollar and U.S. 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 expenditure cycle driven by multipolarity, supply chain restructuring, and national security spending.

Countries are redistributing supply chains away from a single hub, 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 central position 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 only happening in the United States. Europe has room to further expand fiscal spending, China has lower financing costs, and pension funds and private capital in various countries can also be directed toward domestic investment. Economies outside the United States are fully capable of expanding investment and consumption.

Therefore, BCA recommends long-term overweighting of commodities and other real assets for the remainder of this decade, and reducing excessive concentration in expensive U.S. financial assets. The report summarizes 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 reconstruction are the broader investment themes.

However, the capital expenditure cycle will eventually lead to excess. When the world forms sufficient new capacity in the 2030s, inflation may turn downward again. At that point, current higher bond yields may offer attractive allocation opportunities for long-term investors.

Overall, BCA's portfolio approach can be summarized as follows: continue holding risk assets and capturing bond yields in the short term, increase allocation to markets outside the United States, commodities, and real assets over the medium to long term, while remaining vigilant about cyclical turning points brought by large tech IPOs, tightening global liquidity, and escalation of the Russia-Ukraine conflict.

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