Overview
BCA Research released its third‑quarter strategy outlook, signalling that the equity bull market is losing momentum and warning that a 30%‑50% drop in stock prices could occur when the artificial‑intelligence (AI) earnings bubble bursts.
Equity Outlook
The firm’s proprietary MacroQuant equity z‑score fell below the –1 threshold on 12 June, prompting a downgrade of equities from neutral to a modest underweight on both a three‑month and twelve‑month horizon. While BCA stopped short of a more aggressive bearish stance, it noted that a further deterioration in market‑timing indicators would trigger a defensive shift. To offset the equity underweight, BCA recommends a slight overweight to cash and a neutral allocation to bonds.
Strategists, led by Peter Berezin, highlighted that the AI earnings bubble is driven by accounting mechanics: companies that purchase chips from Nvidia or Micron capitalize the expense rather than recognise it immediately, inflating aggregate earnings without a corresponding cash‑flow increase. Since 2019, forward profit margins for the S&P 500 have risen by 3.8 percentage points, with the IT sector’s margins up 11.3 points. Consequently, the S&P 500 is trading at roughly 26.5 times forward earnings today, versus an estimated 20 times had margins remained flat. The team likened the AI boom to the “7th or 8th inning” of a baseball game, suggesting the most exciting phase is nearing its end and that equities could fall 30%‑50% when the bubble finally bursts.
Fixed‑Income Outlook
BCA projects bond yields to remain broadly range‑bound for the remainder of 2026 and judges a recession unlikely this year. However, the analysts warn that an AI‑driven bust could unleash a significant deflationary wave across the global economy, forcing central banks into easing mode and pushing yields lower. The firm anticipates moving to a long‑duration bond position at some point over the next twelve months.
Currency Outlook
For the U.S. dollar, BCA sees near‑term strength supported by rate differentials and momentum, but a more challenging longer‑term outlook. The dollar is currently trading about 16% above its purchasing‑power‑parity fair value, and a reversal of portfolio inflows into U.S. equities could weigh on it substantially. East Asian currencies—including the Japanese yen, Chinese yuan, and Korean won—are deemed the most attractive over the longer horizon.
Commodities Outlook
On oil, BCA believes prices are approaching a floor after Brent crude retreated to $73 per barrel from a recent high of $144, with the fragile U.S.–Iran ceasefire limiting further downside. Metals are favoured over crude on a longer‑term basis due to structural supply constraints. Gold faces near‑term headwinds from a stronger dollar and lower inflation, yet the metal is viewed positively over time, supported by central‑bank buying and its modest share of global household wealth.
Methodology Note
The equity timing signal derives from the MacroQuant model, which aggregates a range of economic and financial indicators. The model’s breach of the –1 threshold triggered the equity downgrade. All forward‑margin and valuation figures are based on BCA’s internal calculations.