Wall Street investment banks: The greater risk next year is not "U.S. recession leading to market crash", but "market crash leading to U.S. recession".

A recent outlook report from Wall Street has overturned traditional beliefs, pointing out that the biggest threat to the US economy in 2026 may come from the financial markets themselves. According to the latest outlook from investment research firm BCA Research, investors in 2026 are facing a core risk that has reversed: it is no longer economic recession dragging down the stock market, but the potential collapse of the stock market may directly push the US economy into recession. This view challenges the common perception and suggests that the resilience of the US economy is hanging on a fragile balance supported by stock market wealth. BCA Research explicitly states in the report that a key support for the current US economy comes from the spending of approximately 2.5 million "excess retirees" population. These retirees retired early due to the stock market boom after the COVID-19 pandemic. Their spending power is directly linked to stock market performance, forming a "stock market-sensitive" demand side. The report analyzes that this structural change poses a dilemma for the Federal Reserve. On one hand, the exit of these highly skilled retirees exacerbates labor shortages, keeping inflation stubbornly at around 3%; on the other hand, if high interest rates are maintained to curb inflation, it may burst the stock market bubble, destroy this crucial consumption, and trigger an economic recession. Therefore, BCA Research predicts that the Federal Reserve will prioritize avoiding market crash above its 2% inflation target, choose to tolerate a higher inflation rate, and may take aggressive rate cuts measures when there are signs of economic or market weakness. This policy path, combined with the most concentrated market rally in history, paints a complex and variable picture for global asset allocation in 2026. 2.5 million "excess retirement" population: Achilles' heel of the US economy BCA Research's report reveals an important structural change that has been overlooked by the market: the continuous decline of older workers in the US labor market. The report states that since the pandemic, there has been a phenomenon of approximately 2.5 million "excess retirees" in the US. There are two main reasons behind this: older age groups are more vulnerable in the pandemic, and the strong rise in the stock market has created financial conditions for them to retire early. These 2.5 million new retirees inject strong demand into the US economy through their generous pensions and stock market wealth. However, as retirees, they do not contribute to the labor market supply. This "consume-only, not produce" mode keeps the US labor market continuing to be "supply constrained" while the demand is strong, largely avoiding economic recession caused by weak demand. But the risk lies precisely here. The report emphasizes that this critical marginal consumption is entirely dependent on stock market wealth. Once the stock market crashes, the wealth foundation that supports the consumption capacity of these 2.5 million people will cease to exist, causing a severe blow to total demand and leading to an economic recession. The Federal Reserve's dilemma: tolerate 3% inflation to avoid recession While supporting demand, the "excess retirement" phenomenon has also brought a price to the US economy stubborn inflation. The report analyzes that the skills of many experienced older workers (such as top surgeons, lawyers, or professors) are difficult to replace, and their exit from the labor market leads to a tighter labor market than what the overall data shows. This scarcity of skills, combined with strong consumption demand, is a key reason for the stability of the inflation rate at around 3%. This dilemma has put the Federal Reserve in a predicament. If it continues to tighten monetary policy to achieve a 2% inflation target, high interest rates will inevitably impact the stock market. As mentioned earlier, the stability of the stock market is a prerequisite for supporting the consumption capacity of these 2.5 million "excess retirees". Dhaval Joshi, the Chief Strategist of BCA Research, believes that between "triggering a recession" and "tolerating inflation," the Federal Reserve will choose the latter as the "lesser evil." The report predicts that the Federal Reserve will sacrifice its 2% inflation target and use any signals of economic weakness as a reason for further rate cuts. For investors, this means that lowering rates in a high inflation environment will be detrimental to the long-term performance of US treasuries and the US dollar. Most concentrated rally in history: Fragile balance under the dominance of tech stocks, opportunity shifts to Europe Another major challenge facing the market in 2026 is that its rally has reached "the most concentrated level in history." Data from the report shows that about two-thirds of the global stock market value is concentrated in US stocks, and 40% of the US stock market value is concentrated in just ten stocks. More worrisome is that the fate of these ten stocks is almost all betting on the same narrative: becoming winners of the general artificial intelligence (gen-AI) wave. This means that more than a quarter of the global stock market value is directly exposed to the risk of failure in this single bet. However, a positive signal is that recently the performance of these top tech stocks has started to differentiate. The report points out that in the past month and a half, while the market value of Nvidia and Microsoft has evaporated nearly $500 billion, the market value of Alphabet and Apple has increased by $600 billion and $200 billion, respectively. This differentiation indicates that the market does not view all tech stocks as a whole, and value investors are still verifying the prices of some companies. BCA Research believes that as long as this situation of "winners and losers offsetting each other" continues, the market is more likely to experience "drift" rather than "collapse." However, this also suggests that the era of US tech stocks outperforming the market as a whole may be coming to an end, and funds may rotate to undervalued sectors and regions, such as healthcare and the European market. BCA Research believes that unlike the US, Europe does not face inflation pressure caused by labor market distortions. This creates a favorable environment for the bond market. The report recommends overweighting German government bonds and UK government bonds in global bond investment portfolios. At the same time, European stock markets are expected to benefit from the outflow of funds from US tech stocks. This article is reprinted from "Wall Street Insights," written by Long Yue, GMTEight Editor: Song Zhiying.