Bank of America's "macro picture" for the next decade: the first 5 years will see "continued inflation," followed by "super deflation" in the next 5 years?

Bank of America Merrill Lynch's latest research report paints a starkly divided macro picture for the next decade: the AI-driven capital expenditure boom combined with "hot operation" fiscal policies will maintain inflationary pressures in the near term, while in the early 2030s, the productivity revolution sparked by AI may usher in one of the most profound deflationary cycles in history. This framework is reshaping investors' fundamental judgments on interest rates, credit, and asset allocation. According to Wind Trading Desk, Bank of America Merrill Lynch strategist Haim Israel's latest report points out that the global economy is approaching a technological "singularity" - a nonlinear turning point where existing economic models and valuation frameworks will completely fail. The core logic is that from 2025 to the early 2030s, massive capital investment in areas such as energy, data centers, and infrastructure will continue to drive inflation; while from 2031 to 2035, the AI-driven surge in productivity will lower costs in energy, healthcare, food, and manufacturing industries, triggering a possible wave of deflation of historical proportions. This assessment has already had a direct impact on the market. Bank of America Merrill Lynch notes that the current market adjustment is mainly achieved through a sustained increase in real yields rather than a collapse in long-term inflation expectations, which means duration assets are under pressure, while credit spreads are relatively resilient. As a result, the bank advises investors to reduce duration, increase credit spreads, prefer municipal bonds and investment-grade credit bonds over government bonds within fixed income, and tilt towards floating rate credit products and stocks. Singularity is approaching, with AI reshaping the cost curve Bank of America Merrill Lynch's report cites Haim Israel's framework, which states that in the past decade, humanity has made breakthroughs in DNA editing, black hole observation, continuous nuclear fusion reactions, and other areas with only about 1% of available global data. The current computing power is tens of thousands of times more powerful and dramatically cheaper than during the Apollo era. The real impact of AI is not in chatbots like Siasun Robot & Automation, but in simulation, optimization, and autonomous systems. The report provides specific data: the drug development cycle has been shortened from 10 years to 30 days, with costs decreasing from billions of dollars to millions, and a success rate approaching 100%; in materials science, millions of new materials can be discovered in a matter of weeks. Batteries, agriculture, weather forecasting, and energy systems are being completely restructured. However, this transformation is currently capital-intensive and inflationary. The report estimates that global investment demand in related sectors exceeds $90 trillion, covering energy, data centers, water resources, copper, lithium, land, bandwidth, and electricity infrastructure. Renewable energy and nuclear power (especially small modular reactors SMRs) are seen as crucial support for AI infrastructure. "Hot operation" policies and AI capital expenditures form a self-reinforcing cycle Bank of America Merrill Lynch believes that the current macro background presents a pattern of "hot operation" policies reinforcing each other with the AI capital expenditure boom. The report notes that under the OBBBA Act and wartime expenditure backdrop, in the first quarter of 2026, the nominal GDP growth rate in the United States reached 6.0%, higher than the 10-year average of 5.5% and the 20-year average of 4.4%, on par with the 50-year average - which also includes the high inflation period from the late 1970s to early 1980s. The key transmission mechanism is the "wealth-reinvestment cycle": US household wealth increases by about $15 trillion annually, on top of the $184 trillion stock base, flowing continuously into consumption and AI, energy, and infrastructure investments to expand supply while maintaining demand. Bank of America Merrill Lynch expects that based on current trends, household wealth will increase from $184 trillion at the end of 2025 to about $214 trillion by the end of 2027. In this context, the 5-year 5-year inflation swap is anchored at 2.45%, and the 10-year real yield remains at around 2.0% at a high level. The report believes that one reason inflation expectations can remain stable is that the market expects the Fed, under the leadership of Warsh, to continue Powell's era of credibility, and the market has already priced in the AI deflationary pressure from 2030 to 2035. Spreads peak, yields have not yet peaked Bank of America Merrill Lynch's "long ceasefire = bullish" logic proposed last month has been confirmed in the direction of risk assets and credit spreads, but has not been effective in the direction of interest rates. The report notes that high-yield bond spreads have narrowed without reaching their previous highs, and investment-grade bond yields seem to have peaked; in contrast, long-term Treasury yields have risen to new highs for the year, with the 10-year Treasury yield breaking past resistance at 4.4% to 4.47%, with technical analysis indicating the possibility of further upside to the 4.55% to 4.75% range. There has been a significant shift in market expectations for the Fed's path: from expecting a 9 basis point rate cut by the end of the year a month ago, to now expecting a 16 basis point rate hike. Bank of America Merrill Lynch's economic team has pushed back their expectations for two rate cuts from October 2026 to September 2027, citing high core inflation still on the rise, strong April nonfarm payrolls, and hawkish comments from Fed officials. In this scenario, Bank of America Merrill Lynch maintains a cautious stance on duration and a constructive view on credit. Recommended securities in the near term include municipal bonds (core and high-yield), leveraged loans, institutional MBS floating rate products, AAA-rated CLOs, preferred stocks, and short duration investment-grade/high-yield bonds. Floating rate credit preferred over duration Taking into account the above framework, Bank of America Merrill Lynch provides clear asset allocation strategies. In an environment of strong nominal economic structure, the bank believes that floating rate credit products represented by BB-rated CLOs are superior to duration assets, and stocks as a whole are better than fixed income. For investors who must maintain duration exposure, long-duration municipal bonds and investment-grade credit bonds are considered more attractive than government bonds, as the former can generate returns without relying on interest rate declines. Regarding credit spreads, Bank of America Merrill Lynch believes that the possibility of further narrowing spreads in 2026, even reaching historic lows, cannot be ignored. The report notes that the peak high-yield bond spread of 335 basis points in 2026 was significantly lower than the peak of 435 basis points in 2025, and the peak occurred earlier, reflecting a decreased tolerance for market risks as the 2026 midterm elections approach under the Trump administration. In the institutional MBS sector, the report suggests that the current spreads (113 basis points) are relatively expensive compared to the 10-year Treasury yield, but if the ceasefire agreement continues, there is further room for MBS spreads to narrow. High-yield bonds are currently considered the relatively cheapest sector, as institutional MBS OAS has narrowed by 32% since the end of 2021, while high-yield bonds OAS has only narrowed by 6% in the same period. Unignorable structural costs The Bank of America Merrill Lynch report also points out that this technological transformation comes with profound social risks. About one billion workers will need to undergo skill reshaping in the context of widespread AI deployment, and traditional education and certification systems are rapidly losing value. The report also identifies mental health risks (loneliness, depression) as social issues of "third-largest economy" level magnitude. On the technological front, the accelerated fusion of AI and quantum computing could reset encryption systems, financial architectures, and even technological design itself within this decade. Bank of America Merrill Lynch emphasizes that this is not a cyclical tech rotation, but a civilization-level systemic shift, with far-reaching and enduring impacts on valuation, labor, energy, and social stability. The Nasdaq 100 index has surged more than 25% in six weeks, and Bank of America Merrill Lynch believes that this trend indicates that the pace of the aforementioned transformation may be faster than expected just a few weeks ago. This article is reprinted from "Wall Street News", GMTEight editor: Li Fo.