The U.S. stock market, as measured by the S&P 500 index, appears to be exiting the “best era” for growth in earnings per share in decades as sources of liquidity have dried up, according to research from Bank of America.
The S&P 500’s earnings per share are “more cyclically peaked than ever from low financing costs, buyback-fueled growth and peak stimulus,” equity and quantitative strategists led by Savita Subramanian said in a BofA Global Research note Tuesday. “Secular EPS growth is at a multidecade high.” The strategists shifted their view of the materials sector to overweight from underweight, while moving utilities down to market weight from overweight. They also moved communication services up to market weight, from underweight, as Facebook parent Meta Platforms Inc.’s META stock buyback program lowered the sector’s duration risk, the report shows.
“We like the capital-deprived sectors,” the BofA strategists wrote. Financials, home builders, materials and fossil fuels are areas of the market that have been “starved of capital” for more than a decade, while technology is among those that have “enjoyed free money, amplifying the duration risk of the S&P 500.”
“The two biggest buyers of treasuries – China and Fed – are done,” the strategists wrote, while fiscal stimulus is “unlikely.” On the fiscal front, the strategists cited the possibility of “gridlock” in Congress along with “deficit hawks’ nuclear option — using the debt ceiling to force spending discipline.” And now companies are “belt tightening,” they said, with layoffs seen in some areas.