BCA Research is signaling a more cautious stance on risk assets in its third-quarter strategy note, saying the equity bull market appears to be losing momentum and that a structural accounting-driven "earnings bubble" tied to AI investment could produce a large correction.
The firm’s MacroQuant equity z-score - a composite quantitative gauge used to assess market timing across economic and financial inputs - dropped below the -1 trigger on June 12. That signal prompted BCA to move its recommendation on equities from neutral to a modest underweight for both a three-month and a 12-month horizon.
BCA stopped short of taking a deeply bearish posture, saying it will only adopt a more defensive allocation if its market-timing indicators deteriorate further. In the near term the firm suggests offsetting the equity underweight with a slight overweight to cash and maintaining a neutral allocation to bonds.
AI earnings mechanics and the bubble risk
The firm’s strategists draw attention to what they describe as an "earnings bubble" concentrated among AI-related companies. Unlike classic bubbles driven primarily by rich price-to-earnings ratios, this one is fueled by accounting treatment: when firms buy chips and related hardware from suppliers such as Nvidia or Micron, those purchases are often capitalized rather than expensed. Capitalization lifts reported earnings without producing a corresponding increase in cash flow, inflating aggregate corporate profitability metrics.
BCA quantifies the effect on profit margins: since 2019 the S&P 500 forward profit margin has expanded by 3.8 percentage points, and the gain is far larger in the information technology sector, where forward margins have widened by 11.3 percentage points. The research house calculates that, had margins stayed flat, the S&P 500 would be trading at about 20 times forward earnings today rather than roughly 26.5 times.
Using a baseball analogy, BCA’s strategists say the AI boom is likely near the seventh or eighth inning - typically an exciting stretch that also precedes the late innings. Their central scenario is stark: if the AI earnings bubble collapses, equities could suffer declines in the 30% to 50% range.
Rates and fixed income outlook
BCA expects bond yields to be broadly rangebound through the remainder of 2026, and judges a recession unlikely during the current year. The research team notes that a bust in the AI cycle would be materially deflationary for the global economy, a dynamic that could push central banks into easing mode and drive yields lower. In anticipation of that potential regime shift, BCA says it plans to adopt a long-duration positioning at some point over the next 12 months.
Currency views
On the dollar, BCA’s strategists foresee near-term strength underpinned by rate differentials and momentum, yet they flag a tougher longer-term outlook. The dollar is trading about 16% above its purchasing-power-parity fair value, the note says, leaving it vulnerable to a swing against U.S. portfolio inflows. If global investors reverse flows into U.S. equities, that could weigh substantially on the currency.
By contrast, East Asian units - specifically the Japanese yen, Chinese yuan and Korean won - are judged the most attractive over the long run in BCA’s view.
Commodities: oil, metals and gold
In commodities, BCA views oil as approaching a floor after Brent retreated to around $73 a barrel from a prior peak near $144, and believes the fragile U.S.-Iran ceasefire will help cap further downside. Over a longer horizon the research house prefers metals to crude given structural supply constraints in metals markets.
Gold faces headwinds in the near term from a firmer dollar and disinflationary pressures, but BCA remains constructive on the metal over time. The firm cites central bank buying and gold’s still-modest share of global household wealth as supportive factors for the metal’s long-term case.
Recommended positioning
Summarizing allocation implications, BCA’s strategists advise a modest underweight to equities, balanced by a slight overweight to cash and a neutral stance on bonds at present. They reserve the option to increase defensive exposures should their market-timing indicators worsen, and plan to move to long-duration bond exposure within the next year if conditions justify it.
The note stresses that the principal vulnerability is the AI earnings mechanism and its potential reversal, and that outcomes will pivot on how that dynamic and related flows evolve.