Chief Investment Officer, Bank of America Corp
2026 Outlook: Geopolitics, policy and your portfolio
Geopolitics and domestic U.S. policy are set to have a large impact on markets and the economy in 2026. As part of the Chief ...
About Christopher Hyzy
Christopher Hyzy, chief investment officer for Merrill and Bank of America Private Bank, has stated that he expects 2026 to be a year of a "proud bull" market, characterized by profit growth rather than multiple expansion. He described the current market momentum as an "elf rally" on the way to a "Santa Claus rally," and said that tailwinds in the first quarter of 2026 could include tax refunds and fiscal relief. Hyzy has also said that the market does not need a Federal Reserve rate cut in December to continue its upward trajectory, as it has already priced in a strong profit cycle through 2026. He has expressed a bullish outlook, referring to the current environment as an "Owl market" where investors seek confirmation of profit acceleration. Hyzy has emphasized that capital spending on AI and data infrastructure is accelerating, and that corporate earnings continue to surprise to the upside. He has advised investors to consider putting excess cash to workched and to stay invested for the long term, while also preparing for potential jolts and short-term volatility. Hyzy has noted that the market is seeing a broadening of participation beyond mega-cap tech, with sectors like energy and small caps showing strength. He has also stated that the Federal Reserve's recent liquidity announcement was a "risk on" move and that he expects markets to end the year on a high note.
Transcript (23 segments)
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Christopher Hyzy0:07
An unsettled global world order. A midterm election that could create a shift in power dynamics in Washington. And the hangover from the longest government shutdown we've ever seen. These are just some of the factors influencing the policy and geopolitical outlook for 2026. I'm Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Joining me today is Larry Di Rita, Head of Public Policy for Bank of America. Larry's experience spans the Department of Defense and Capitol Hill. So he's the perfect person to help us make sense of 2025 and obviously, what's ahead for us in 2026. Larry, thanks for being here.
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Larry Di Rita0:42
Yeah, thanks for having me, Chris.
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Christopher Hyzy0:43
So let's start with 2025. All right, we're about to leave it. We're going to go into a whole new year. Before we think ahead, let's look back on 2025. A lot of numerous policy initiatives were put in place. It was somewhat of a volatile year. It relates to what we witnessed and experienced. Looking back on that, what really surprised you?
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Larry Di Rita1:04
Yeah, well, so the administration, the president, President Trump came into office in 2025. So that was obviously a big transition between the prior administration. They came in wanting to start establishing their own priorities quickly in three broad areas. And when it comes to the U.S., sort of domestic, it was taxes, tariffs, and regulation. So those were the three stools. And it, what actually surprised me, frankly, if you remember, in 2017, it took almost a whole year to get the Tax Cut and Jobs Act passed. They got the one 'Big Beautiful Bill' passed in shorter amount of time and provided some stability around the tax. So the first argument that the market was looking for is, can we see some permanence and stability in taxes? We got that and they did a, you know, pretty effective job getting their priorities through and getting all that done. Now, it's the tariffs. And we're starting to see that to some degree settle in. But there's more work to be done. And then, the big one is deregulation.
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Christopher Hyzy2:02
So now, let's switch to 2026. What's in store for at least the first half?
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Larry Di Rita2:06
Yeah, well, you remember we had, you referenced the government shutdown. It's not, it's over for now. And I think it would be a mistake to look past what has to happen to make sure it doesn't happen again, if you will. So they made an agreement to get to spend at the current levels until the end of January. But they also made certain commitments to work on the premium tax credits on the Obamacare and get some progress there if it can be done. And there's a rough consensus to try and do something. But what the something is, there's a lot of differences. We got to see if we can kind of get through this January 31st deadline without another potential shutdown. And unfortunately, there's political advantages from some vantage points of keeping that tension alive. And so hopefully, we can get through that and then see the stability and then move into a, you know, what becomes a more customary midterm election year.
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Christopher Hyzy3:00
It's a great point. Speaking of potential tension, we have a potential change. It looks like in the chairmanship of the Federal Reserve. Does timing matter in terms of the announcement?
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Larry Di Rita3:11
It might. Now, they're doing a, I think, a good job, vetting names already and getting them out into the market. Let people start to get comfortable. These are the candidates, and the Treasury secretary has more or less indicated who those are, though they have to make an actual decision between now and the end of the year or even into early next year. Well, ultimately, the president will decide what he wants to do there, but it's going to be several months before there's a new chairman. And the question is how much time do they really need to have this person kind of exposed, as distinct from, okay, we've nominated this person. We're going to put him before the committee, have his hearings and move on.
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Christopher Hyzy3:45
Move on. One of the areas that's tough to move on from is the interconnectedness of the US with China. But also some of the developments that are still going on in the Middle East. You want to take a global lens right now in terms of our international relations?
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Larry Di Rita3:58
Well, you mentioned China and that's the, so I said, tariffs are starting to come into shape. China's the one exception. There's a bit of a detente right now between the US and China. You see these things spike and then come back down. That's the most current cycle we're in where there was the meeting in Korea between the president and President Xi Jinping. And that kind of reset the clock to, say, August. So it sort of got us back to a little bit more of a stable footing. What actually comes out of all that remains to be seen. That's the big one. You mentioned the Middle East. You know, we've seen a recent visit to United States by the crown prince of Saudi Arabia. There's Israeli elections next year. There's a strong desire to see the Saudis join the Abraham Accords and normalize relations with Israel. That would be a really important step toward sort of some stability in the Middle East. We've still got Iran out there. And that really hasn't been resolved. And so the Middle East is an area where they're still, hopefully, we'll see this Gaza peace plan kind of unfold in a way that really does lead to some stability in that part of the region.
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Christopher Hyzy5:01
You talked about China, overall, and one of the biggest topics that we're dealing with now, the race for dominance of technology, digital infrastructure, et cetera, and huge components of that are rare earth minerals. Do you want to talk a little bit about the work that your team is doing there?
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Larry Di Rita5:17
Yeah, the rare earth is an important issue. It seems to have provided the Chinese government leverage over the United States in these negotiations. The question is how long that leverage can last because the rare earths are less rare than people think. What's rare is the ability to process these. And the world sort of subcontracted that to China many years ago. And so, China stepped up and decided this would be a competitive advantage for them. And they're taking advantage of that in a very effective way. The question is, over time, can the rest of the world, and there's a whole right, actually, beginning in prior administrations to create a sort of critical minerals, sort of coalition around critical minerals. And you're seeing the US government is actually making investments in whether, the U.S., this is an administration that is very comfortable with industrial policy, with meaning of, sort of state-driven, you know, private sector investment scheme. They've already taken a couple of equity positions in some companies. We've seen that already. I expect we'll see more of that as they, really, as they try and get past this, I think somewhat temporary, but still durable Chinese advantage in the processing of rare earth minerals.
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Christopher Hyzy6:22
One of our larger themes, really, since I guess, the new administration took over, but really, in the last few years, is this increase in defense spending, globally, particularly in Europe, coming out of the still situation that's going on with Russia and Ukraine? Do you want to talk a little bit about that?
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Larry Di Rita6:39
Yeah, no, it's an important development. And again, something that's been building over many years. But the president has done a very good job. And the European leaders agreeing that Europe needs to step up and spend more. The European Commission is talking about as much as $800 billion in additional fiscal capacity for all those countries to spend. They're developing European defense funds, you know, in the multibillion dollars. So I think you're going to see more and more infrastructure spending in Europe, and defense spending in Europe, coming out of governments, coming out of the private sector. It's a high priority. You're going to see probably a lot of U.S. defense companies trying to become very important there, but also European companies stepping up and really getting involved.
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Christopher Hyzy7:22
Yeah. We're going to switch a little bit back to U.S. interest now, midterm elections next year. Everyone's starting to talk about it already. Is it too early to just, not just handicap things but too early to suggest what are the big issues?
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Larry Di Rita7:38
It's probably, you're going to start to see that. And I don't think it's too early to think about, you know, the big issues, ultimately, a control of you know, sort of, how much can the president and the administration get done if they lose control of the House of Representatives? That's the big, that's what's at stake. And there's only a few seat margin for the Republicans right now. The issue, ultimately, is control of the president's agenda, because if he loses the House, then you get a sort of standoff where it's hard to get a lot done.
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Christopher Hyzy8:03
One final wild card question. Big discussion is still the data center build out, the race for technology dominance. Do you, in the Washington circles, is that a big theme for Washington?
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Larry Di Rita8:17
It's a big theme, but that no one is quite sure that they know enough about to want to do something dramatic. I mean, we talked about rare earths already and what the administration's doing, their chips and things like that. But when it comes to AI, you're seeing a general or like digital assets, things of that nature. You're seeing a general sort of respect for this is really big. It could be transformational. We don't know that. So let's not move too fast. And I think that's what you're seeing more than anything else. Congress has tried to prevent the states from legislating too aggressively on AI, for example, and the proper uses of AI. The states still want to be able to do something. California and others have introduced legislation to do that. But Congress knows, there seems to be a sensibility that this is big and it's transformational. So don't move too fast. Or you could lock in something that we're not going to like.
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Christopher Hyzy9:07
Deregulation coming?
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Larry Di Rita9:08
Yeah, I think we're going to see more of that. Like I said, the three stools, the three legs of the stools, taxes, tariffs, and deregulation, they're really addressing all three of them pretty aggressively. And we're going to see more in the area of permitting and, you know, things of that and bringing products to market faster. And, you know, just in terms of bank regulation, we're seeing a reset with some of the things that have been long talked about and are finally being addressed. So yeah, I think we're going to continue to see those three. The administration knows it has to make progress in those three areas for the economy to continue to grow.
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Christopher Hyzy9:37
That's right. Larry, I want to thank you for joining me today.
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Larry Di Rita9:40
Thanks for having me, Chris, it's terrific to talk to you.
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Christopher Hyzy9:41
We hope you enjoyed this look at key policy issues. As our conversation shows, policy changes and geopolitical events may change with little or no warning. While our conviction for a positive, even transformative year ahead for the economy and equity still holds firm, it's important to prepare for potential jolts and short-term volatility. Remember that investment strategy starts with your own personal goals. We recommend staying invested for the long term, staying diversified, and speaking with an advisor about adjustments that may be needed as the world and your own personal priorities evolve.