The Fed's Policy Shift: How BofA's Rate Cut Forecast Reshapes Equity and Fixed Income Strategies

The Federal Reserve’s dovish pivot in 2025 has triggered a seismic shift in strategic asset allocation, with Bank of America (BofA) at the forefront of recalibrating expectations. Initially, BofA projected no rate cuts in 2025 due to inflationary concerns, but the release of weak August jobs data—showing an unemployment rate of 4.3%, the highest since October 2021—prompted a dramatic revision. The bank now forecasts two 25-basis-point rate cuts in September and December 2025, with an additional 75 bps of easing in 2026 [1]. This shift reflects the Fed’s growing prioritization of labor market stability over inflation risks, as evidenced by Chair Jerome Powell’s dovish remarks at Jackson Hole [2].

Equity Strategies: Tilting Toward Growth and Regional Opportunities

The dovish tilt has directly influenced equity allocation strategies. BofA’s equity strategists emphasize overweights in U.S. technology and communication services, sectors poised to benefit from AI-driven earnings growth and extended fiscal stimulus [3]. The firm also highlights regional opportunities in Japan, Hong Kong, and emerging markets, where valuation support and fiscal easing create favorable conditions [4]. For instance, Japanese equities are gaining traction as the Bank of Japan’s accommodative policy contrasts with tighter U.S. monetary conditions, while emerging markets benefit from dollar weakness and trade policy tailwinds [5].

Conversely, BofA maintains an underweight in Consumer Staples due to exposure to low-income retail segments, which face headwinds from tariffs and wage stagnation [6]. However, Consumer Discretionary sectors are overweighted, particularly if the Fed’s easing materializes, as weaker labor markets could spur demand for discretionary spending [7].

Fixed Income: Duration Adjustments and High-Yield Allure

In fixed income, the dovish environment has reshaped duration strategies. BofA and other experts recommend focusing on the front end of the yield curve, where short-term yields are expected to benefit from rate cuts. U.S. 10-year Treasuries are projected to trade within a 3.75% to 4.50% range, with a steepening bias as the Fed’s policy shift unfolds [8]. Investors are also advised to adopt bond laddering strategies to manage interest rate risk, while seeking higher income outside core bonds—particularly in high-yield corporate debt, which offers all-in yields near 7.5% [9].

Sovereign bonds outside the U.S. are another focal point. Italian government bonds (BTPs) and UK Gilts are favored over Japanese bonds, reflecting divergent monetary policy trajectories and relative value opportunities [10]. Meanwhile, emerging market local rates benefit from high real yields and dollar depreciation, making them attractive for active credit selection [11].

Strategic Implications and Policy Uncertainties

The Fed’s data-dependent approach introduces volatility, with the September 2025 FOMC meeting serving as a pivotal inflection point. While BofA’s forecast assumes two rate cuts in 2025, the final decision hinges on incoming inflation and employment data [12]. For investors, this underscores the importance of dynamic asset allocation—balancing growth-oriented equities with defensive fixed-income positions to navigate potential stagflationary risks.

In summary, the dovish Fed environment has catalyzed a strategic reallocation toward U.S. tech, emerging markets, and high-yield bonds, while emphasizing duration management and regional diversification. As the Fed’s policy path crystallizes, investors must remain agile, leveraging both macroeconomic signals and granular sector insights to optimize returns.

Source:
[1] Bank of America announces huge shift in Fed rate cut forecast [https://www.thestreet.com/fed/bank-of-america-announces-huge-shift-in-fed-rate-cut-forecast]
[2] Quick View: Yield curve steepens on Powell's dovish tilt [https://www.janushenderson.com/en-us/advisor/article/quick-view-yield-curve-steepens-on-powells-dovish-tilt/]
[3] Global Asset Allocation Views 3Q 2025 [https://am.jpmorgan.com/us/en/asset-management/institutional/insights/portfolio-insights/asset-class-views/asset-allocation/]
[4] Fed outlook 2025: Key insights for fixed income investors [https://www.ishares.com/us/insights/2025-fed-outlook-fixed-income]
[5] August Barometer of financial markets outlook [https://am.pictet.com/us/en/investment-views/multi-asset/2025/august-barometer-of-financial-markets-outlook]
[6] Weekly Market Recap Report from Bank of America Global [https://business.bofa.com/en-us/content/market-strategies-insights/weekly-market-recap-report.html]
[7] BofA, UBS Latest to Join Push for Small-Cap Outperformance [https://www.bloomberg.com/news/articles/2025-08-25/bofa-ubs-see-small-cap-outperformance-as-powell-turns-dovish]
[8] Global Asset Allocation Views 3Q 2025 [https://am.jpmorgan.com/us/en/asset-management/institutional/insights/portfolio-insights/asset-class-views/asset-allocation/]
[9] Fixed Income Outlook 2025: Sector Picks [https://www.morganstanley.com/insights/articles/bond-market-outlook-fixed-income-2025-sector-picks]
[10] Fed outlook 2025: Key insights for fixed income investors [https://www.ishares.com/us/insights/2025-fed-outlook-fixed-income]
[11] Fixed Income Outlook 3Q 2025 [https://am.gs.com/en-gb/advisors/insights/article/fixed-income-outlook]
[12] Weekly fixed income commentary | 08/25/2025 [https://www.nuveen.com/en-us/insights/investment-outlook/fixed-income-weekly-commentary]