Bank of America strategists have identified key themes that investors should closely monitor in the face of bearish headwinds. The themes include de-globalization, inflation, and rising borrowing costs, all of which present potential risks to the economy and markets. Despite these challenges, there are still reasons for optimism.
De-globalization, according to Bank of America, can have a negative impact on margins as it limits opportunities for cost, labor, and tax arbitrage. However, US corporations have been gradually reducing their reliance on China since 2017, and margins have remained stable. Imports from Mexico and Canada have helped fill the gap left by China’s reduced role in trade with the US. Additionally, the US government has been encouraging Big Tech companies to bring certain production processes back to American soil. These factors are seen as positive for stocks through capital expenditure, job creation, increased consumption, and reduced exposure to slowing regions.
The bank also highlighted the uncertainty surrounding inflation, as recent years have seen periods of stagflation, hyperinflation, deflation, and re-inflation. Strategists differentiated between stocks that could perform well in scenarios of high versus low inflation. Companies involved in commodities, such as Freeport-McMoRan, Mosaic, and Devon Energy, have shown a strong positive relationship with Bank of America’s inflation composite. On the other hand, consumer-facing companies like Amazon, Best Buy, O’Reilly Automotive, and Clorox have shown a negative relationship.
Furthermore, Bank of America warned about the impact of central bank rate hikes on the cost of capital. This has disrupted assumptions about the availability of cheap debt and free money, leading to uneven earnings among companies in various sectors. Rising borrowing costs pose a risk to earnings growth. However, the use of artificial intelligence and labor efficiency improvements could help mitigate this risk.
In conclusion, investors should closely monitor the themes of de-globalization, inflation, and rising borrowing costs, as they can significantly impact the economy and markets. Despite these challenges, there are still reasons for optimism, such as the shifting global landscape, potential opportunities in commodities, and improvements in labor efficiency and artificial intelligence.
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