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Bank of America pointed to three risks that could upset corporate earnings growth, which is the main driver of stock returns.
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One potential headwind is Trump’s proposed tariff plan, Bank of America said.
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The company is also closely monitoring bond yields, which have risen since the election.
It was the stock market Ride high Since Donald Trump won the presidential election.
A key driver of this has been investors pricing in strong future earnings growth, which is seen as a direct byproduct of Trump’s plans to cut the corporate tax rate and ease regulation.
Although Bank of AmericaEnd of year goal for Standard & Poor’s 500 Slightly above current levels, new research from the company’s equity strategy team has identified three developments that could derail the ongoing earnings-per-share “cycle.”
Firstly, An economic recession can significantly undermine earnings growth, Which caused the stock’s S&P EPS to fall by 10% to 20%.
Although an economic downturn in the United States is not the base case for Bank of America, the bank noted that the risk of a recession is a real possibility under incoming President Donald Trump.
That will depend on what policies the next administration prioritizes, analysts wrote in a separate note. In a scenario in which Trump pushes dramatic immigration restrictions and protectionist trade policies amid minimal fiscal easing, the economy would sink into recession.
Peak-to-trough earnings drawdowns of 20% are typical in average recessions. Under this scenario, EPS would fall to $195-$220 next year.
To be sure, Bank of America also sees opportunities for explosive growth, if the president-elect deemphasizes trade restrictions and immigration in favor of tax cuts and deregulation. In this case, GDP growth could exceed 3% in 2025.
Second, if Trump’s trade plans are implementedretaliatory tariffs could lead to a 10% decline in earnings per share.
During his campaign, the president-elect pledged to impose a 10% tariff on all foreign imports into the United States. This will not apply to Chinese products, which will face a 60% rate instead.
If Trump stays true to his word, Bank of America expects U.S. foreign sales to receive a 3% to 4% decline as the rest of the world sets its own retaliatory tariffs.
The bank said that in the escalating trade war, industrial and semiconductor stocks will be most at risk.
third, A spike in bond yields could cut earnings per share by another 10%.
The worst-case scenario for Bank of America would be if the 10-year Treasury yield rose to 7%, a situation that could happen if Trump’s tariff and immigration cuts trigger an inflationary shock.
If this happens, the jump in yields would imply that the PMI would reach 43 by the end of 2024.
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