The two Massive Extended-Term Dangers Facing Markets and the Economy: Bank of America

The American customer has been resilient in 2023. Jeff Greenberg / Getty

• Investors should not be so down on corporate earnings as initially-quarter final results handily beat estimates, BofA stated.
• BofA raised its 2023 S&ampP 500 EPS forecast by eight% and introduced a new 2024 forecast that suggests 9% development.
• But there are two looming dangers that could in the end rattle the economy and the stock market place.

1st-quarter earnings final results are in, and they are a lot far better than Wall Street analysts anticipated.

Bank of America’s Ohsung Kwon stated in a Thursday note that corporate America’s capability to promptly adapt to a volatile macro atmosphere suggests investors should not be so damaging on the economy offered that earnings final results beat estimates by five% as businesses commence to concentrate on productivity and efficiency gains.

“A sturdy initially-quarter after once more showed corporate America’s capability to preserve margins,” Kwon stated, highlighting the reality that inflation pressures are easing while pricing power remains on solid footing.

The bank upgraded its S&ampP 500 2023 earnings per share estimate to $215 from $200 due to the initially-quarter earnings strength, representing an boost of eight%. Also, Kwon introduced the bank’s 2024 S&ampP 500 EPS estimate at $235, which would represent annual development of 9%.

“Earnings ordinarily recover stronger than they fall and we count on 2024 to be a far better profit atmosphere soon after companies’ concentrate on efficiency and productivity,” Kwon stated, adding that a weaker US dollar could also enable increase profit development subsequent year.

Bank of America

Further upside drivers to corporate earnings, the economy, and the stock market place incorporate a new capital expenditure cycle that leads to major investments from businesses, with an estimated $600 billion in mega projects becoming announced considering that January 2021, according to the note.

Even though the capital expenditure boom is becoming driven by reshoring efforts, in which businesses bring some or all of their production and sourcing capabilities back into America, some is also becoming driven by more than $550 billion in fiscal stimulus that stems from the bipartisan infrastructure bill. 

These components pale in comparison to the key issue that helped increase corporate earnings more than the previous decade: economic engineering in the type of stock buybacks.

“We count on productivity-led earnings development ahead, rather than financially engineered development from the final decade,” Kwon stated.

But there are nevertheless two major, lengthy-term dangers that could negatively influence the economy and stock market place, according to Kwon.

These dangers are the increasing trend of de-globalization and refinancing dangers due to larger interest prices.

“We are coming out of the most effective 20-year period for earnings development, which started with China joining the WTO in 2001. De-globalization is a major secular threat, which drove most of the margin improvement more than the previous 20 years,” Kwon explained.

And though about 75% of corporate America’s existing debt burden is fixed at historically low interest prices, larger interest prices could nevertheless be a headwind for particular sectors, like True Estate and Industrials, if the Federal Reserve does not reduce prices in the foreseeable future.

And current FOMC minutes from the Fed recommend a lot requires to take place for interest prices to be reduce anytime quickly.

Bank of America

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