Spending by affluent American households and the surge in technology investment in artificial intelligence might not be sufficient to keep the U.S. economy out of recession, according to BCA Research analysts.
In a research note, strategists led by Doug Peta said that even though they raised their stock outlook earlier this month due to the potential for an AI-driven rally, they still maintain a “jaundiced view” of the economy’s short-term prospects.
“Equity investors don’t see anywhere near the recession risk that we do,” they wrote, warning that the economy could slide into a downturn “before the year is out.”
BCA noted that their recession forecast is an “outlier,” with consensus estimates placing the likelihood of a downturn “nowhere near as high” as their odds of “just slightly above 50/50.” Some investors have argued that their projections underestimate the impact of strong spending by wealthy households and the AI boom.
However, the analysts defended their stance, emphasizing that economic expansions are “strongest” when a broad spectrum of consumers participate, and highlighting recent signs of weakness in the U.S. labor market.
“Investors have too much faith in wealthy households’ ability to spend enough to stave off the effects of a broad hiring freeze. It will be hard to escape a recession if employment growth doesn’t pick up soon,” they said.
While companies in the AI sector may be “spending like drunken sailors” on emerging technology, BCA said those outlays alone “cannot counter recessionary winds.”
Looking ahead, BCA predicts the Federal Reserve will “ultimately cut” interest rates more than markets currently anticipate in 2026, though they noted that “long-run inflation expectations remain well anchored.”
“The bond market doesn’t think the Fed has relaxed its inflation vigilance,” they added.
Last week, the Fed reduced interest rates by 25 basis points and released updated projections indicating many officials expect another half-point of cuts to help mitigate a slowdown in the labor market.
However, seven of the 19 forecasts in the Fed’s closely watched “dot plot” predicted fewer cuts this year, with one suggesting rates remain within the prior range of 4.25% to 4.5% through 2025.
Fed Chair Jerome Powell described the recent rate reduction as a form of “risk management,” with the central bank weighing the twin challenges of slowing employment growth and persistent inflation.
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