Goodbye stagflation: 3 reasons BofA sees the US economy avoiding a worst-case scenario

The US economy may have successfully steered clear of a dire outcome many observers were warning of just a few months ago.

That’s according to analysts at Bank of America, who said they believe the US economy could be more on track for a cyclical boom rather than an episode of stagflation, a nightmare situation in which inflation rises while economic growth slows.

Stagflation is commonly thought of as even worse than a typical recession, as policymakers are prevented from cutting interest rates to boost the economy.

For a while, that scenario was one of the biggest fears on investors’ minds as they weighed the impact of Donald Trump’s “Liberation Day” tariffs.

But strategists said they think the economy is now leaning away from such a situation, even as many global fund managers surveyed by the bank said in June that they thought the global economy would slip into stagflation over the next 12 months.

“The latest fund manager survey shows a small increase in investors expecting a Boom rather than the base case of Stagflation,” analysts wrote, defining a “boom” as above-trend economic growth and above-trend inflation.

“We agree with this building minority, and present below corroboration from our quantitative work,” they added.

Here are three reasons the bank sees stagflation risk fading.

1. Trump’s pro-growth agenda

President Donald Trump’s America-first economic agenda is expected to act as a tailwind to the US economy, BofA strategists said.

The bank pointed to stimulus measures included in Trump’s “Big Beautiful Bill,” as well as the push to boost activity in US manufacturing.

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“Moreover, with mid-term elections a few quarters away, it behooves the current administration to implement pro-growth policy now,” the bank’s strategists added.

2. Big spending

Companies and the public sector are spending big on artificial intelligence, infrastructure, and manufacturing, BofA said.

For AI in particular, analysts said they were expecting $700 billion in capex from the so-called hyperscalers through 2025 and 2026, with “upward revisions each quarter.”

“The number of companies outside of the US planning to expand manufacturing capacity in the US continues to increase. Municipalities have also refocused on infrastructure with aged capital stock fraying as domestic activity increases,” they added.

3. Economic recovery mode

Bank of America’s US Regime Indicator, a gauge for where the US currently is in the business cycle, looks to be “on the brink” of an economic recovery, analysts said.

The US Regime Indicator ticked lower in June, which indicates that the economy is still in a “downturn” phase. Downturn phases are typically followed by economic recovery phases, the bank suggested.

The US Regime Indicator saw six inputs from the economy improve last month, strategists noted, which also suggests that the economy could soon be on the uptrend. Here were the six positive changes analysts saw:

1. Earnings per share revisions. Earnings revision breadth bottomed out around -25% in April, according to Morgan Stanley data. Since then, it’s improved to -5%, the bank said in a June note, implying that the market is growing more optimistic on corporate earnings.
2. GDP forecasts. Despite a contraction in the first quarter, real GDP was projected to expand 2.8% year-over-year in the second-quarter, according to advanced estimates from the Commerce Department.
3. Manufacturing strength. The Institute for Supply Management’s Production Index, one measure of activity in manufacturing, rose to 50.3 in June, which signals that production moved into expansionary territory.
4. Leading Economic Indicators. A collection of economic indicators showed signs of improvement on a year-over-year basis, BofA said.
5. Capacity Utility. The use of “installed productive capacity” in the goods and services sector also improved on a year-over-year basis, strategists added.
6. High-yield credit spreads. Credit spreads—which is the yield paid over a benchmark—have narrowed, which signals higher investor confidence and lower levels of financial stress among companies.