Investment research firm BCA Research states that the biggest threat to the US economy in 2026 will come from the financial markets themselves. Approximately 2.5 million “excess retirees” have consumption levels directly linked to stock market performance. If the stock market crashes, it could trigger an economic recession, prompting the Federal Reserve to tolerate a 3% inflation rate.
(Background briefing: An unhappy casino economy is taking shape, with American young people feeling pessimistic and powerless about the future.)
(Additional background: US OCC approves! Ripple, BitGo, Circle, and five other crypto giants receive “conditional approval” for trust bank licenses.)

Table of Contents

• 2.5 million “excess retirees”: the Achilles’ heel of the US economy
• The Federal Reserve’s dilemma: tolerating 3% inflation to avoid recession
• Narrowest bull market in history: fragile balance under tech stocks’ “solo dance,” opportunities shifting to Europe

To prevent a stock market crash that could lead to a recession, the Federal Reserve might tolerate a 3% inflation rate and be ready to cut interest rates at any moment. This will put pressure on long-term US bonds and the dollar.

A recent outlook report from Wall Street overturns traditional thinking, suggesting that the greatest threat to the US economy in 2026 may originate from the financial markets themselves.

According to BCA Research’s latest outlook, the core risk facing investors in 2026 has reversed: it is no longer an economic recession dragging down the stock market, but rather a potential stock market collapse that could directly push the US economy into recession. This view challenges the market consensus and indicates that the resilience of the US economy is precariously balanced on stock market wealth.

BCA Research explicitly states in the report that a key support for the current US economy is the consumption of about 2.5 million “excess retirees.” These individuals retired early due to the post-pandemic stock market boom, with their spending directly tied to stock market performance, creating a “stock-sensitive” demand-side.

The report analyzes that this structural change presents a tricky dilemma for the Federal Reserve. On one hand, the departure of these highly skilled retirees worsens labor shortages, keeping inflation stubbornly around 3%; on the other hand, maintaining high interest rates to curb inflation risks bursting the stock bubble and destroying this critical consumer base, potentially triggering a recession.

Therefore, BCA Research predicts that the Fed will prioritize preventing market collapse over its 2% inflation target, choosing to tolerate higher inflation rates and potentially undertake aggressive rate cuts at any signs of economic or market weakness. This policy path, combined with the historically narrow bull market, paints a complex and volatile picture for global asset allocation in 2026.

2.5 million “excess retirees”: the Achilles’ heel of the US economy

BCA Research’s report reveals an important structural change overlooked by the market: the continuous decline of older workers in the US labor market. The report states that since the pandemic, about 2.5 million Americans have retired early (“excess retirees”). There are two main reasons: first, the elderly were more vulnerable during the pandemic; second, the strong stock market rally created financial conditions for early retirement.

These 2.5 million newly retired individuals are injecting strong demand into the US economy by spending their substantial pensions and stock market wealth. However, as retirees, they do not contribute supply to the labor market. This “consumer-only, non-productive” pattern means that while demand remains high, supply remains constrained, largely preventing demand-driven recession.

But the risk lies precisely here. The report emphasizes that this marginal consumption heavily depends on stock market wealth. If the stock market crashes, the wealth supporting the consumption of these 2.5 million people will vanish, severely reducing total demand and potentially leading to a recession.

Federal Reserve’s dilemma: tolerating 3% inflation to avoid recession

The “excess retirees” phenomenon supports demand but also comes at a cost—persistent inflation.

The report analyzes that many seasoned older workers (such as top surgeons, lawyers, or professors) possess skills that are hard to replace. Their departure from the workforce tightens the labor market more than overall data suggests. This skill shortage, coupled with strong consumer demand, is a key reason why inflation remains around 3%.

This puts the Fed in a dilemma. If it continues to tighten monetary policy to achieve its 2% inflation goal, high interest rates will inevitably impact the stock market. As previously mentioned, stock market stability is a prerequisite for maintaining the consumption capacity of the 2.5 million “excess retirees.”

BCA Research’s chief strategist Dhaval Joshi believes that between “triggering a recession” and “tolerating inflation,” the Fed will choose the latter as the “lesser evil.” The report predicts that the Fed will sacrifice its 2% inflation target and use any signs of economic weakness as reasons to further cut rates. For investors, this means that lowering interest rates amid high inflation environments could be unfavorable for long-term US bonds and the dollar.

Narrowest bull market in history: fragile balance under tech stocks’ “solo dance,” opportunities shifting to Europe

Another major challenge in 2026 is that the market’s rally has reached “the most concentrated in history.” Data shows that about two-thirds of global stock market capitalization is concentrated in US equities, with 40% of US market cap in just ten stocks.

Worse still, the fate of these ten stocks is nearly all betting on the same narrative: becoming winners in the wave of general artificial intelligence (gen-AI). This means that over a quarter of the global stock market value is directly exposed to the risk of a single failed bet.

However, an optimistic signal is that the recent trend of these leading tech stocks has begun to diverge. The report notes that over the past month and a half, while Nvidia and Microsoft’s market caps have shrunk by nearly $500 billion each, Alphabet and Apple’s market caps have increased by $600 billion and $200 billion, respectively. This divergence indicates that the market is not viewing all tech stocks as a single entity, and value investors are still testing some companies’ valuations.

BCA Research believes that as long as this “winners and losers offset each other” situation persists, the market is more likely to drift rather than collapse. But it also suggests that the era of US tech stocks outperforming the market may be ending, with capital shifting into undervalued sectors and regions like healthcare and Europe.

BCA Research argues that unlike the US, Europe does not face inflationary pressures caused by labor market distortions. This creates a favorable environment for bonds. The report recommends overweighting German and UK bonds in global bond portfolios. Meanwhile, European stocks are expected to benefit from capital outflows from US tech stocks.

📍Related Reports📍

YouTube opens stablecoin payments, allowing US creators to receive PYUSD revenue share

Taiwan’s Central Bank again says No to Bitcoin reserves! Replies to legislators with a “research report” refusing to follow the US and Czech experiments

The printing press is back! US Federal Reserve initiates “Reserve Management Purchase Program,” to buy $40 billion in short-term government bonds within 30 days starting 12/12