Investors were expecting a much easier economy now.
Inflation was expected to remain easy, consumers were expected to buckle under higher rates, and the Fed’s next big debate was supposed to be about when to start deflation.
However, Bank of America it doesn’t tell the story.
The bank sees the economy as having enough momentum to avoid inflation. According to its mid-year outlook shared with me, spending levels are holding steady, the labor market is not slowing, and growth is alive and well.
However, that tension is not spread evenly, and that twist is uncomfortable.
The US economy may be strong in key inflation areas but weak in key domestic areas.
That raises a very difficult question: What happens when the economy is too hot to be comfortable, but too unbalanced to be healthy?
What Bank of America says about America’s two economies
Perhaps BofA’s most impressive economic call is that the US is actually running on a few different tracks.
In its mid-year outlook, the bank described the economy as a K shape, calling it “average income, stagflation for less money.”
Wealthy families continue to spend at a strong pace, led by strong balance sheets, asset gains, better job security, and market exposure led by the power of income and AI investments.
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Conversely, low-income families continue to absorb the brunt of the cycle, with sticky prices, high borrowing costs, and renewed gas pressure.
The split is clear in the BofA card data.
During the week of June 6, spending is low for some 5.5% year after year, while higher spending is increasing 6.1%.
But the gap widens at the top: Spending is top 5% rose 7.8%while using the top 1% he jumped 9.0%. On May 30th, the use of low income increased 4.0%compared to 7.6% top 5% again 8.6% for the top 1%.
Simply put, the consumer is not universally strong, and the strongest households are strong enough to keep aggregated data looking healthy.
Bank of America warns a strong U.S. economy is masking a growing consumer divide. John Lamparski/Getty Images
Why the Fed might make the pain worse
Perhaps the most uncomfortable part of BofA’s view is that the economy is not yet strong enough to sound comfortable.
In fact, it seems to be strong enough to create a new level of problem.
BofA sees real GDP growing 2.3% in 2026as the unemployment rate is close 4.3%. However, the same prediction came true PCE inflation at 3.5% again core PCE at 3.3%which leaves inflation above the Fed’s target, even if growth continues to move.
So the problem is that growth is far from cracking, while fertility is unabated, as sticky inflation still plays a major role.
Speaking of employment, compared to last May, the unemployment rate is lower, the core PCE is elevated 70 base pointsand the policy rate is 75 is the base low score. As a result, the bank expects 75 base points rate hike this year, as I have covered recently.
Moreover, the risk of inflation is even deeper than a single hot note.
BofA says inflation is still there “stuck above the target,” with basic measures also holding more than 2%. Demand for services is still pushing up inflation, while prices have renewed chronic supply-driven pressure.
The Fed may need to tighten because stable parts of the economy continue to keep inflation hot, even as weaker parts feel squeezed.
AI is holding up growth, but it’s bringing its own shocks
Bank of America says AI is more than just simple tech-stock trading.
In its mid-year outlook, the bank says the growing AI-related elements have become an indicator. want to panic in the wider economy.
To get an idea, the use of AI no longer just raises the likes of Nvidia, cloud stocks, or the Magnificent 7. It also helps support the growth of the US.
Backing up that argument with some data, Business Insider, citing Goldman Sachs, says 2026 AI capex for these four could reach $725 billion, nearly double the 2025 figure.
In addition, the four largest AI users increased their Q2 2026 capital spending by 74% year-over-year to $168 billion, indicating that AI buildout is still moving at a rapid pace, as investor inquiries return.
BofA estimates that AI investments will add up 0.4 percentage point in GDP growth this year, while investment in AI adjusted for imports is rising 0.7% of GDP in 2026.
In a diversified economy, that’s a big cushion. Consumers continue to put in the work, but AI capex is becoming a major driver of domestic demand.
However, the benefits of AI do not come equally.
BofA says the job impact is already being seen in white-collar workers’ services, while productivity gains remain an open question.
In addition, that situation is also linked to the risk of the stock market. If BofA is right on the Fed’s hike, rate-sensitive companies may feel the most pressure.
In fact, the report says that part of the microfinance debt is short-term or floating rate, while a 75-basis-point cycle would increase the interest costs of previous Russell 2000 funds. 13% 2025 EBIT in 2027.
Related: Microsoft lays off thousands as Xbox faces rude awakening
This story was originally published by TheStreet on Jul 7, 2026, where it first appeared on The economy part. Add TheStreet as a Preferred Source by clicking here.
