Preparing for the unpredictable

Nobody has a crystal ball. But if you’re wondering what’s going to happen with markets in the second half of the year—it’s worth asking Joe Quinlan.

Quinlan is managing director and head of market strategy at Bank of America private bank. His team focuses on market analysis and asset allocation across Bank of America’s wealth management business, and helps construct their portfolio.

We spoke with Joe about the biggest risks investors face in the months ahead, and how to prepare now.

Our conversation has been edited for length and clarity.

Many investors have been surprised by the market’s resilience over the past year, given the Iran war and political chaos. What could go wrong now?

One possibility is that inflation comes in higher than expected. That’s not our base case—especially since oil prices have fallen sharply—but it’s a risk. Another risk is that the Federal Reserve may have to move more aggressively than markets currently expect. Our economists are kind of an outlier, looking for the Fed to raise rates three times—that’s a contrarian call right now, and if that happens, we’re going to be set up for some more volatility.

So the biggest risks are elevated inflation leading to more aggressive monetary tightening, and geopolitical tensions—particularly involving the US and Iran—creating another oil shock. Oil prices have already fallen about 40%, but what happens if they rise 40% again? Again, that’s not our base case, but it’s something we’re watching.

You argue that AI-driven productivity gains could help keep long-term inflation in check. How much evidence are you seeing today that AI is actually boosting productivity, versus investors simply betting that it eventually will?

At this point, the productivity gains are still minimal because adoption rates remain relatively low, although they’re accelerating. If you look at previous technological revolutions, whether it’s the internet or any other massive technological undertaking, we see the productivity benefits come through two, three, four years later after adoption accelerates.

At the company level, though, AI is already affecting how businesses operate across industries such as energy, transportation, and financial services. We just haven’t yet seen those effects show up in aggregate economic data. So for now, AI’s impact is more evident in corporate earnings and company-level performance rather than in top-down macroeconomic indicators. But we do believe broader productivity gains are coming.

Are there any AI-related investment opportunities that you think are being overlooked?

We see opportunities in sectors like healthcare, industrials, and transportation. The AI investment story is broadening beyond the infrastructure providers and toward the end users—

companies that can use AI to operate more efficiently, boost productivity, and increase margins.

We’re looking at areas such as infrastructure, utilities, and the electric grid. Companies are adopting AI at different speeds, but over time, the technology should have a powerful impact on margins and profitability across many sectors.

How should investors prepare for the next year?

Investors should be doing their own homework about where they have exposure across the S&P 500. They should understand where they have exposure, whether they’re overly concentrated in US assets, and whether they should be getting more exposure overseas.

The important thing is to do the homework, because when a pullback occurs and you want to deploy cash, you’re ready to go. Drawdowns can happen quickly, and markets often snap right back. Investors should be looking at where the opportunities lie within their portfolios to be positioned for any pullbacks.—LB