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Bank of America cited three risks that could disrupt corporate earnings growth, a key driver of stock returns.
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One possible hurdle is Trump’s proposed tariff plan, BofA said.
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The company also closely monitors bond yields, which have skyrocketed since the election.
The stock market has been on the rise since Donald Trump won the presidential election.
One of the main drivers of this has been that investors value strong earnings growth in the future, seen as a direct byproduct of Trump’s plans to reduce the corporate tax rate and loosen regulation.
Although Bank of America’s year-end target for the S&P 500 is slightly above current levels, new research from the firm’s equity strategy team exposed three developments that could derail the current “upward earnings cycle.” action” that is driving earnings.
First, An economic downturn could significantly undermine earnings growth, which caused the S&P EPS to fall by 10% to 20%.
Although a U.S. recession is not BofA’s base case, the bank cited the risk of recession as a real possibility under incoming President Donald Trump.
That will depend on what policies the incoming administration prioritizes, the analysts wrote in a separate note. In a scenario in which Trump imposed drastic restrictions on immigration and protectionist trade policies amid minimal fiscal easing, the economy would plunge into recession.
Benefit reductions of 20%, between peaks and troughs, are typical in an average recession. In this scenario, EPS would fall to between $195 and $220 next year.
To be sure, BofA also sees scope for spectacular growth if the president-elect downplays trade and immigration restrictions in favor of tax cuts and deregulation. In this case, GDP growth could even exceed 3% in 2025.
Second, if Trump’s trade plans are implemented.retaliatory tariffs could cause a 10% hit to EPS.
During his campaign, the president-elect pledged to implement a 10% tariff on all foreign imports to the United States. That would not apply to Chinese products, which would instead face a 60% rate.
If Trump stays true to his word, BofA expects U.S. foreign sales to take a hit of 3% to 4% as the rest of the world sets its own retaliatory tariffs.
In the escalating trade war, industrial and semiconductor stocks would be most at risk, the bank said.
Third, a dramatic rise in bond yields could reduce earnings per share by another 10%.
The worst-case scenario for BofA would be for the 10-year Treasury yield to rise to 7%, a situation that could arise if Trump’s tariff and immigration cuts trigger an inflationary shock.
If this were to happen, the jump in performance means the Purchasing Managers Index would reach 43 by the end of 2024.