It also offered a glimpse into why the bond market remains pessimistic on interest rates, inflation, and the deficit at the same time—much of which is also due to Trump’s policies.
A key takeaway from the BofA report is that the Federal Reserve’s plans to purchase billions in Treasury bills are being seen as a form of quantitative easing that will keep market yields lower into the first half of 2026. Chair Jerome Powell told the media the move wasn’t related to QE. Still, the bank said in a separate report that “the important point here is that the Fed will keep liquidity pipes open, because directly or indirectly someone has to finance the record fiscal deficit.”
Add in the idea of a so-called tariff refund floated by President Donald Trump and the continuing decline in gas prices, as well as a surprisingly resilient job market, and it’s easy to construct a positive backdrop for stocks and the economy in 2026.
“Fed QE, Nvidia chips to China, $2k stimmy checks, gas prices back below three bucks … no wonder we’re all max bullish,” the BofA Flow Show report said.
The BofA report suggests, however, a view of Trump’s various policies that could be construed as part of a political strategy to “run the economy hot” into next year’s midterm elections to offset the weakness seen in recent election polling. The latest Gallup survey from November showed Trump’s overall approval rating at just 36%.
“His ratings on individual domestic issues such as the economy, immigration and the federal budget deficit, which were previously areas of relative strength for him, are no longer,” Gallup said.
However, engineering a host of strategies to boost the stock market, stoke consumer spending, and bring down energy prices could deliver a stronger-than-expected economy into the autumn campaigns.
“Democrats are confident of strong gains amid voter frustration over living costs and the Epstein files,” said James Knightley, ING’s chief international economist, on Friday.
“While retaking the Senate is unlikely, winning the House is realistic,” he added. “Not surprisingly, this is something [Trump] will be keen to avoid, and he’s likely to try to pull every lever to regain the initiative.”
Earlier this week, Trump gave himself an “A-plus-plus-plus-plus-plus” grade on his stewardship of the economy, called issues of affordability a “hoax” perpetrated by Democrats, and said he saw no reason why U.S. gross domestic product shouldn’t grow “20% or 25%” each year.
“Much work remains, but President Trump and his Administration will continue to do what’s necessary to turn Joe Biden’s economic disaster around and restore the historic economy Americans enjoyed during the first Trump term,” White House spokesman Kush Desai told Barron’s.
Bank of America’s report also suggested that investors already are positioning themselves for this “run it hot” strategy by rotating out of favored megacap tech giants and into “Main Street”-focused areas such as mid-cap and cyclical stocks.
The small- and mid-cap focused Russell 2000 has powered 5% higher over the past month, and hit a record intraday peak in early Friday trading. The S&P 500, by contrast, has gained only 0.2% over the same time frame.
The Dow Jones Industrial Average also hit an intraday record on Friday and sits within touching distance of 50,000.
But “run it hot” policies also extract a stern cost in the form of faster inflation, rising deficits, and faster debt accumulation, all of which are likely to lift Treasury bond yields and add to government borrowing costs.
Some of that pressure is already evident.
Benchmark 10-year Treasury note yields, perhaps the single most important interest rate in the world, were last marked at 4.19% on Friday and trading near the same levels they were before the Fed rate cut on Wednesday. Longer-dated 30-year bond yields were last seen six basis points higher at 4.86%, the highest since Sept. 5. (100 basis points is one percentage point.)
That’s an unusual situation that can sometimes signal a pushback from the bond markets against expansionary policies that stoke inflation. Inflation is seen as the “enemy of bonds” as it erodes the value of future coupon and principal payments.
Bond investors also have been expressing concerns about a potentially pliant Fed chairman who would ensure a supportive monetary backdrop to support the president’s expansionary fiscal policies
“If Treasury yields do climb, the next step for a Fed more attuned to Trump’s way of thinking could be renewed asset purchases to lower the cost of borrowing across the economy,” said ING’s Knightley.
“Such a situation could prompt significant dollar weakness and potentially more inflation while pumping up the equity market even more,” he added.
Investors will need to decide if the added value to stocks—and hit to bonds—will be worth the cost.
Write to Martin Baccardax at martin.baccardax@barrons.com
