Focus Shifts from Tariffs to Tax Cuts and Rate Easing – BofA Warns of Policy-Driven Bubble, AI Remains a Bright Spot

TradingKey - The easing of trade war tensions and reduced geopolitical risks have supported bullish sentiment in U.S. equities, with the S&P 500 nearing all-time highs. As policy focus shifts from tariffs to tax cuts and potential interest rate cuts, U.S. equity analysts at Bank of America warn that bubble-like risks are rising in the second half of 2025 — though artificial intelligence (AI) remains a standout sector with strong upside potential.

In a recent report, BofA’s Michael Hartnett noted that growing expectations for Federal Reserve rate cuts are drawing significant capital inflows into equities — increasing the risk of speculative bubbles forming in financial markets.

According to EPFR Global, $164 billion has flowed into U.S. equities year-to-date in 2025, putting the market on track for the third-largest annual inflow on record.

BofA warned that with policy momentum now shifting toward tax cuts and interest rate easing, the second half of 2025 could see rising bubble risks in equities, accompanied by further weakness in the U.S. dollar.

Last Friday (June 20), capital markets closely followed dovish comments from Fed officials regarding inflation and rate cut prospects. News that the Fed is considering loosening financial capital regulations also reinforced expectations of greater liquidity ahead.

AI Bubble Concerns Fade Amid Strong Fundamentals

Over the past two years of an AI-driven bull market, concerns over an "AI bubble" have frequently surfaced, as investors question how tech giants can monetize their heavy investments in AI infrastructure and applications.

Fortunately, recent corporate earnings reports and executive commentary have helped ease these concerns. Micron Technology, a leading U.S. memory chipmaker, reported quarterly results and issued guidance that beat market expectations, signaling robust demand for high-bandwidth memory (HBM) chips used in AI data centers.

NVIDIA CEO Jensen Huang, speaking at the company’s 2025 Annual Shareholder Meeting, said AI demand continues to rise unabated. He noted that Microsoft alone saw a more than fivefold increase in AI model requests in the most recent quarter. Huang also predicted that billions of robots, hundreds of millions of autonomous vehicles, and hundreds of thousands of robotic factories will soon be powered by NVIDIA’s technology.

Bank of America emphasized that there is no AI bubble — at least not yet. Instead, accelerating profit growth from AI-related companies is likely to become the most significant upside surprise for both U.S. and global stock markets in the second half of 2025.