Bank of America Calls Fed Cuts Dead Until 2027—Even as Markets Price Geopolitical Relief
Hawkish inflation outlook collides with equity rally narrative as prolonged high-rate regime threatens AI capex, credit refinancing, and startup funding cycles.
Bank of America now expects the Federal Reserve to hold rates steady until the second half of 2027, contradicting market consensus and challenging the assumption that geopolitical de-escalation alone can sustain the current equity rally. The call arrives as the S&P 500 trades at fresh all-time highs following the Iran ceasefire, but it implies inflation will remain above the Fed’s 2% target through most of 2026 and into 2027—a scenario that would constrain corporate leverage, AI infrastructure spending, and M&A activity regardless of Middle East stability.
The Inflation Case That Keeps Rates Higher
CBS News reports that BofA Global Research cited “core inflation is too high, and moving up” as the primary rationale for delaying rate cuts until the second half of 2027. Inflation at 3.3% sits 130 basis points above the Fed’s target, while April’s labor market added 115,000 jobs—nearly double the 65,000 consensus forecast. The resilience of employment and wage growth sustains consumer spending power, which in turn keeps upward pressure on prices across services and core goods categories.
The Federal Reserve held the federal funds rate at 3.5–3.75% for the second consecutive meeting in April 2026, per Trading Economics. That decision drew an unusual 8-4 vote, with four officials dissenting in favor of a cut—the most dissent against a FOMC decision since October 1992. The split signals internal pressure for relief, but Chair Powell’s majority coalition remains committed to restrictive policy until inflation shows sustained deceleration.
“Core inflation is too high, and moving up.”
— BofA Global Research
CME Group’s FedWatch tool now prices less than 50% probability of any cut before the second half of 2027, validating BofA’s contrarian positioning. The market has shifted from expecting two cuts in 2026 to pricing essentially zero near-term relief—a material repricing that occurred as Iran ceasefire headlines drove equity indices to new highs.
Equity Rally Built on Geopolitics, Not Fundamentals
The S&P 500 fell 9.1% following the outbreak of the US–Iran conflict before rallying 13.6% to reach new all-time highs, hitting 7,273 in early May, according to Winthrop Wealth and Euronews. The move was driven in part by systematic hedge funds buying $86 billion of stock exposure in just five trading sessions following the ceasefire—the fastest buying pace on record. That technical dynamic, combined with short covering, produced a sharp relief rally that pushed valuations higher even as macro fundamentals remained under pressure.
Systematic hedge funds and volatility-targeting strategies had reduced equity exposure sharply during the conflict phase. The ceasefire announcement triggered automatic rebalancing algorithms that bought back exposure en masse, amplifying the rally beyond what fundamental investors would have supported based on earnings or economic data alone.
Chris Zaccarelli, chief investment officer at Northlight Asset Management, told TheStreet that “the economy is so much better than what the doom crew has been saying,” pointing to GDP growth, corporate profit expansion, and job gains. Yet that strength is precisely what keeps the Fed from cutting—a paradox that leaves equities vulnerable if the high-rate regime persists through 2027.
AI Capex Meets Cost-of-Capital Headwinds
The five largest US cloud and AI Infrastructure providers have collectively committed to spending between $660 billion and $690 billion on capital expenditure in 2026, with the vast majority directed at AI compute, data centers, and networking, per Futurum Group. Wall Street analysts now estimate total AI Capex could climb above $1 trillion in 2027, with 2026 estimates rising to between $800 and $900 billion following Q1 earnings revisions, according to CNBC.
Meta CEO Mark Zuckerberg stated that “we are increasing our infrastructure capex forecast for this year. Most of that is due to higher component costs, particularly memory pricing.” The combination of rising input costs and elevated financing costs creates a squeeze: hyperscalers must deploy capital at scale to maintain competitive positioning in AI, but the returns on that investment remain uncertain while the cost of debt-financed expansion has risen materially since 2021.
| Metric | 2025 | 2026E | 2027E |
|---|---|---|---|
| Big Tech AI capex | ~$490B | $660–900B | $1T+ |
| Fed funds rate | 3.5–3.75% | 3.5–3.75% | 3.25–3.5% (H2) |
A prolonged 3.5–3.75% rate environment through most of 2027 raises the hurdle rate for internal rate of return calculations on AI infrastructure projects. For startups and venture-backed firms building AI applications on top of cloud infrastructure, the dual pressure of higher interest costs and elevated hyperscaler pricing for compute creates a funding availability problem—particularly if public market appetite for growth-stage IPOs remains muted in a high-rate regime.
Credit Refinancing Wall Looms
Leveraged loan spreads for BB and B rated corporate credits narrowed further in late 2025 and ended the year near their lows for this century, reports LPL Research. The tight spread environment masks underlying stress: the refinancing wall looming in 2026/2027 poses risks for companies that issued debt during the ultra-low-rate era, with a growing cohort of “zombie companies” carrying higher interest costs than operating income.
PitchBook data shows leveraged loan maturities in 2026 and 2027 have declined to $59 billion as of December 2025, but maturities expand sharply in 2028 to $301 billion. The total amount of loan maturities over the next three years stands at $360 billion. If BofA’s forecast proves correct and rates remain at current levels through most of 2027, firms facing 2028 maturities must refinance at materially higher all-in costs—compressing margins and forcing asset sales or balance sheet restructuring.
The dynamic creates a bifurcated credit market: large-cap investment-grade issuers with strong cash flow can weather the high-rate environment, while mid-market and leveraged borrowers face mounting pressure. M&A and LBO activity, already subdued in 2025, is likely to remain constrained as private equity sponsors struggle to achieve target returns at elevated debt costs.
What to watch
- May and June CPI prints—consecutive sub-2.5% readings would pressure the Fed to ease sooner; sustained above 3% validates BofA’s timeline
- Q2 2026 earnings guidance from hyperscalers—any pullback in AI capex commitments signals cost-of-capital sensitivity
- Corporate credit default rates in H2 2026—uptick in restructurings among leveraged borrowers would confirm refinancing wall stress
- Fed dissent dynamics—if the 4-official minority grows to 5 or 6 by June FOMC, internal pressure for cuts intensifies
- Equity volatility regime—sustained VIX below 15 suggests technical flows still dominate; spike above 20 indicates fundamental repricing
The central tension is simple: markets have priced geopolitical relief and strong earnings, but BofA argues the macro backdrop—persistent inflation, resilient labor markets, and restrictive Fed policy—will eventually override those narratives. If core inflation remains above 3% through Q3 2026, equity multiples face compression regardless of whether the Iran ceasefire holds. The current all-time highs in the S&P 500 may represent a technical peak driven by positioning rather than a fundamental breakout, leaving limited room for expansion if the cost of capital stays elevated into 2027.