Must Read Research: Shifting Econ Outlook; Concentration Bubble Risk; Semis; Prediction Mkts

Hello, and welcome to Must Read Research on B of A Global Research Unlocked. In this podcast, we offer quick summaries from the prior week's most interesting and impactful research. I'm T.J.

Thornton, Head of Product Marketing at B of A Global Research, and we're recording this episode on Monday, June 29th, 2026. It is possible to have too much of a good thing. We see signs of that today with market concentration, jobs, inflation, and bullish sentiment, and it's leading to market rotation.

This week, we highlight why strong labor markets should lead to a less accommodative Fed, find signs that investors are looking for upside in new places, discuss how buoyant memory demand has led to more long-term contracts, and cover prediction market debates now that share has started to broaden. Let's begin with the macro backdrop and what's driving the shift in policy expectations. The global economics team now expects the Fed to deliver three 25-basis point hikes in September, October, and December, reversing last year's 75-basis point risk management cuts.

Our updated view is now more hawkish than the markets, which implies only one to two hikes by year end. The shift reflects a firmer labor backdrop, with job growth back above break-even, new Fed chair, and a persistent inflation problem. Core PCE is tracking towards three and a half percent, nearly 70 basis points higher than a year ago, with services inflation remaining sticky as housing disinflation fades.

While some inflation pressures are tied to one-offs like tariffs and energy, the breadth of stickiness suggests policy is not yet restrictive. U.S. inflation is projected to be 3.4% in 4Q26, still well above the Fed target. We expect 2.3% inflation in 4Q27, with the Fed on hold that year, and we modestly raise our global growth forecast following the Iran agreement.

From a more hawkish policy outlook, let's turn to markets, where positioning is beginning to shift. Chief investment strategist Michael Hartnett's flow show notes that markets are undergoing a tactical rotation away from mega-cap AI into smaller, more cyclical segments, marking early signs of broadening after extreme concentration. Flow data confirms the inflection.

Equities have seen their first outflow since March 2026, with tech reversing from record inflows to record outflows, even as positioning still remains crowded. Concentration is still elevated. AI now represents roughly 39% of the S&P, while the Nasdaq has nearly doubled the performance relative to the S&P since March.

The B of A bubble risk indicator, a zero-to-one price-based gauge combining returns, volatility, momentum and fragility to detect bubble-like dynamics, is now at 0.8, signaling a two-tailed regime of continued upside alongside rising interim risk. Our Japan equity strategists observe that leadership is similarly concentrated in high beta AI stocks, with dispersion at levels last seen during the dot-com and global financial crisis peaks, prompting calls to rotate into non-AI sectors as a hedge. They raise forecasts for the topics in the UK, expecting about 10% upside by year-end, but cite near-term risks.

From rotation in equity markets, let's move deeper into the AI value chain, where demand dynamics are continuing to evolve. U.S. semis analyst Vivek Arya now sees the semiconductor industry total addressable market reaching $2.7 trillion by 2030. That's a 28% CAGR, driven by memory intensity as AI workloads scale.

But the more underappreciated shift is on the contract side. Long-term agreements, and especially strategic contract agreements, are quietly de-risking the cycle, locking in multi-year volume and pricing visibility while enabling semi-cap design automation and reshoring beneficiaries to underwrite capacity against rising chip complexity. Micron's latest results put that shift into focus, with strategic contract agreements now accounting for half of forward revenue, supporting margin expansion and continued demand strength.

The pushback remains that rising memory costs could weigh on customers and moderate pricing. Finally, let's turn to the consumer-facing side of the shift, where prediction markets are emerging as a new area of competition. DraftKings has become a battleground stock, which shares whipsawing throughout June as investors weigh whether prediction markets represent a meaningful growth catalyst or a potential drag on profitability.

Prediction market share has riven to above 2%. However, the cost of capturing that growth, with aggressive promotions driving an estimated $300 to $550 million in losses this year, and near-term monetization is limited by low take rates. The core business adds to the debate.

DraftKings is gaining share in sports betting and approaching fan-dual in net gaming revenue, but iGaming trends remain soft, with market share down to 21% from 25%. So from shifting Fed expectations to rotation beneath the surface of equity markets to evolving AI demand dynamics and the growing debate around prediction markets, those are the themes shaping the conversation this week. Thanks for listening.

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