Bank of America Says If Something Breaks the Economy, It’ll Happen This Summer: How Investors Can Play It
Written by
John Csiszar
Edited by
Zuri Anderson
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The stock market has had a volatile run thus far in 2025, and more may be in store ahead. The primary reason for this is that investors hate uncertainty.
Stock market investments are based on the future value of current assets. In the current market environment, too many variables are unknown and/or constantly changing. That’s not the type of situation in which you want to bet your whole bankroll. Thus, the market is susceptible to big swings based on even passing headlines.
The experts at Bank of America know that investors are thirsting for some type of concrete answer as to where the markets are headed, but even they have no crystal ball. Here are the two scenarios they see as the most plausible for the year ahead, and the reasons why any break in the market — for better or worse — is likely to come this summer.
Why All the Uncertainty?
The market is likely at an inflection point due to a number of factors pulling it in different directions. Although the economy has been surprisingly resilient, interest rates remain stubbornly high, and many market participants are hoping for one or more Federate Reserve (Fed) rate cuts before the end of the year.
Fed rate cuts provide a tailwind to the economy and spur its growth engine, reducing the chance that it falls into a recession. As this translates to increased corporate earnings, stock prices generally rally.
The flip side of that coin is that a growing economy can also overheat to the point that it pushes inflation higher. Higher inflation reduces corporate profits and typically results in higher interest rates, constricting the economy further. That’s usually a bad scenario for stock prices.
The fly in the ointment in 2025 is the Donald Trump administration’s tariff policy, which many experts view as inflationary. If tariffs do translate to higher prices for American consumers, the Fed is highly unlikely to cut interest rates any time soon, and may even raise them if inflation rises sharply.
But the final status of the tariff policy is far from certain, as the Trump administration has continually made broad, market-moving proclamations and then rolled them back. Whether or not that will ultimately be a successful strategy is an additional unknown, making investors wary of where to place their bets.
What Does Bank of America Mean About the Economy Possibly ‘Breaking’ This Summer?
Analysts at Bank of America have outlined two potential scenarios for the market and the economy in the second half of 2025.
The bank’s “base case” is that the labor market will continue to be resilient but that the Trump administration’s tariffs will keep inflation high enough to prevent the Fed from cutting interest rates this year.
Option two is that the labor market weakens and the economy threatens to fall into a recession, under the weight of high interest rates and rising inflation spurred on by tariffs. Under that scenario, Bank of America said the Fed will move quickly to cut interest rates and forestall a recession, perhaps by as much as 75 basis points (0.75%).
What Does It All Mean for Stocks?
On Jul. 8, Bank of America analysts raised their year-end price target for the S&P 500 by a whopping 700 points, to 6,300. While the seemingly dramatic move was based “on the resilience of corporate America,” in actuality it’s not much for investors to get excited about. The S&P 500 index closed at 6,280.46 on Jul. 10, meaning the big price target boost from Bank of America suggests a gain of just 0.3%.
The truth is that in either of the Bank of America scenarios for the rest of the year, there’s not much upside left for stocks. If inflation remains high and the Fed doesn’t cut interest rates, it will no doubt lead to disappointment among many investors, keeping a lid on stock prices.
On the other hand, a “break” in the economy this summer, while potentially leading to interest-rate cuts, could be a sign of weakening corporate profits or perhaps even a recession. This is another scenario that’s not ideal for stocks. Either way, uncertainty and volatility may continue through the end of 2025.
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