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Must Read Research

Also featuring commentary from global economic weekly, october 27, 2024.

Candace Browning, Head of BofA Global Research

With Halloween approaching, markets are doling out more treats than tricks. This week, we unmask nuclear energy’s glowing future and digest a brew of tariff proposals that might be less frightful than feared.

After a three-day event at the Idaho National Lab, Ross Fowler thinks the development of new nuclear technologies is underappreciated.

According to U.S. Department of Energy (DOE) estimates, U.S. nuclear capacity must triple to 300GW by 2050. Supportive federal legislation and investment commitments in Small Modular Nuclear Reactors (SMRs) are signs of progress. As Ross describes in his recent primer, SMRs are zero carbon, advanced nuclear reactors designed to be smaller scale, prefabricated versions of traditional reactors. Ross thinks there will be challenges in developing SMRs (e.g., supply chains, workforce skills, licensing issues, etc.) but he also believes costs will decline over time. SMRs could come online late 2020s to early 2030s.

Higher tariffs, if imposed, may not be as inflationary as expected.

Candidate Trump has proposed 60% tariffs on $430 billion of goods from China and a 10% tariff on $2.74 trillion of goods imports from the rest of the world. The average tariff rate on Chinese goods is 19%— Senior U.S. Economist Aditya Bhave calculates a 40pp (percentage point) increase would be worth about $170 billion. The impact on headline inflation would probably be no greater than 0.9pp and the actual effect could be smaller. For example, currency weakness could offset higher tariff rates while retailers could absorb some of the tariffs in margins. At face value, new tariffs would increase annual customs revenue by about $450 billion. But, in Aditya’s view, tariffs shouldn’t be viewed as a stable source of public revenue since importers could re-jigger supply chains to lower tariff bills. Aditya also thinks new tariffs on Mexico & Canada (30% of U.S. imports) are unlikely to be implemented.

Please visit our Must Read Research webpage weekly for our latest insights.

Featuring Commentary from Global Economics Weekly

Claudio Irigoyen, Head of Global Economics, BofA Global Research

The dollar talks

Discussions in Washington on the side of the IMF (International Monetary Fund) meetings were centered around the domestic and global implications of the U.S. presidential elections. Admittedly, certain electoral outcomes can have important consequences for the U.S. and global economy depending on the menu of public policies to be implemented as well as their timing. Beyond presidential elections, one interesting discussion that has resurfaced is the role of the U.S. dollar and the health of its status as reserve currency of the world. While we think there is no real competitive alternative to the dollar now, the landscape is certainly evolving in a way that merits paying attention to certain developments.

China: The next PBoC cut in 2025? Helen Qiao and team expect additional monetary easing, but another policy rate cut may be less likely this year. We expect 30bp (basis point) cuts in 2025. While external constraints ease, domestic ones persist: more rate cuts could lead to deposit outflows, NIM (net interest margin) pressure on banks. PBoC can also deploy quantitative tools.

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BofA Global Research Offers Economic and Market Outlook for 2023, Calling for Markets to Turn “Risk-On” Mid-Year

December 12, 2022 at 8:05 AM Eastern

Recessions are expected in the U.S., Euro Area and UK, but bonds should offer opportunity in the first half of the year; equities in the second half

The global economy and markets were rattled by two significant shocks in 2022: an inflation shock and an interest rate shock. Going into 2023, one expected shock remains: recession. Amid this backdrop, BofA Global Research economists and strategists released their outlook for 2023, noting the year should be a story of two halves. The U.S., Euro Area and UK are all expected to see recessions next year, and the rest of the world should continue to weaken, with China a notable exception. The recession shock likely means corporate earnings and economic growth will come under pressure in the first half of the year, while at the same time, China’s reopening offers a reprieve for certain assets.

“This past year has seen significant market volatility due to surging inflation, geopolitical risks, and central banks hiking at paces not seen in decades,” said Candace Browning, head of BofA Global Research. “In 2023, inflation should come down, but it will take time for central banks to declare victory. Next year will continue to present uncertainties in the markets but also opportunities for investors willing to be patient and choose their spots carefully.”

Key macro calls made for the markets and economy in the year ahead are:

• Markets turn “risk on” in mid-2023: With inflation, the U.S. Dollar and Fed hawkishness peaking in the first half of 2023, markets are expected to tolerate more risk later in the year. The S&P 500 typically reaches its bottom six months ahead of the end of a recession, and as a result, bonds appear more attractive in the first half of 2023, while the backdrop for stocks should be better in the later half. We expect the S&P to end the year at 4000 and S&P earnings per share to total $200 for the year.
• A recession is all but inevitable in the U.S., Euro Area and UK: Expect a mild U.S. recession in the first half of 2023 with a risk that it starts later. Europe likely sees recession this winter with a shallow recovery thereafter as real incomes and likely overtightening pressure demand.
• U.S. Rates stay elevated but expect a decline by year end 2023: The yield curve is expected to dis-invert and rates volatility should fall.  Both two-year and ten-year U.S. Treasuries should end 2023 at 3.25%. Sectors hurt by rising rates in 2022 may benefit in 2023.
• China’s reopening happens but could be bumpy until later in 2023: China’s gradual reopening is underway, with most curbs expected to be removed by the second half of the year.
• After a volatile start to 2023, Emerging Markets should produce strong returns: Once inflation and rates peak in the U.S. and China reopens, the outlook for Emerging Markets should turn more favorable. China equities will likely strengthen due to a reversal in both zero-COVID and property tightening.
• After a historically bad year for industrial metals in 2022, cyclical and secular drivers are expected to boost metals in 2023, and copper rallies approximately 20%: Recessions in key markets are a headwind but China’s reopening, a peaking U.S. dollar and especially an acceleration of renewables investment should more than offset these negative factors for copper.
• Higher for longer oil prices: Russian sanctions, low oil inventories, China’s reopening, and an OPEC that’s willing to cut production in case demand weakens should keep energy prices high. Brent Crude is expected to average $100 per barrel over the course of 2023 and spike to $110/bbl in the second half of the year. 
• Reshoring capex remains strong, even in a recession: A strong labor market, ESG, U.S./China decoupling, and deglobalization/reshoring are expected to keep certain areas of capex strong, even in the event of a recession.
• The U.S. consumer gets some relief on prices, but also becomes less willing to spend given the wealth effect and as labor markets worsen: Labor markets should finally ease in 2023 and the U.S. unemployment rate should peak at 5.5% in the first quarter of 2024, hindering consumer spending.
• The end of Fed hikes and more conservative corporate balance sheet management lead to a positive backdrop for credit: Weaker prospects for growth and higher rates lead managements to shift prioritization to debt reduction from share buybacks and capex. Total returns of approximately 9% are expected in investment grade credit in 2023 in addition to a default rate peak of 5%, far below past recessions.

BofA Global Research

The BofA Global Research franchise covers more than 3,500 stocks and 1,180 credits globally and ranks in the top tier in many external surveys. Most recently, the group was named No. 2 Global Research Firm of 2021 by Institutional Investor magazine; No. 2 in the 2021 Institutional Investor Global Fixed-Income Research survey; No. 2 in the 2022 Institutional Investor All-America survey; and No. 1 in the 2022 Institutional Investor Developed Europe survey. For more information about any awards cited, visit  https://rsch.baml.com/awards .

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Global Research Unlocked

Listen and subscribe to Global Research Unlocked. A podcast from BofA Global Research. Nuanced insights that can help you chart the right path. Our industry-leading analysts discuss what’s emerging – from risks and opportunities to growth themes like AI and energy transition.

26 minutes ago

High yield boom can get loud with election clarity but rates must cooperate

HY issuance recovers but net new credit largely absent Spreads in the US high yield market are near the tightest levels ever, providing a constructive read on the US economy. Tight spreads and lower rates have led to a pickup in HY issuance, which recently approached more normal levels, but that has since slowed as rates moved up. And much of the issuance seen has been used for refinancing. The positive is that there could be another leg for issuance as companies sell debt to finance capex or acquisitions. This is the Fed transmission mechanism at work. Oleg discusses the impediments to such a shift and the implications of getting the election behind us. We also discuss private credit, how rapid growth in that market impacts high yield and where Oleg sees the best opportunities.   You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.   "Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. ©2024 Bank of America Corporation. All rights reserved.

29 minutes ago

Rising insurance prices becoming as dependable as active storm seasons

Insurance costs should continue to rise in high risk areas Insurance is in the news again following two damaging storms. Sadly, for many homeowners, much of the damage won't likely be covered by insurance given that it's flood-related and nationally, only about 4% of homeowners have flood coverage. Some homeowners will choose to add flood, adding to the cost of homeownership, but especially in Florida, there was wind damage too. This damage was inflicted on a FL insurance market where 15-20% of policies are written by Citizens Insurance, controlled by the state. Josh Shanker believes that Citizens has underpriced policies and as FL looks to shift these policies to the private market, insurance premiums should rise, adding to what are already the highest insurance premiums in the country. Josh also discusses strides made by the state of FL in reducing fraud in the state's insurance market, the impact that could have on pricing and the latest outlook for auto insurance where he's been bullish on pricing for several years.   You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.   "Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. ©2024 Bank of America Corporation. All rights reserved.  

19 hours ago

Japan conference reinforces view there’s another leg higher for markets

Corporate transformation, AI could drive Japan equities Last month, BofA Global Research hosted its annual Japan conference. Over 500 investors joined, and attendance was up 2% versus the prior year. Japan equities rallied sharply through July, but then a rate hike from the BoJ and a stronger Yen disrupted the upward momentum. Daisuke Takato suggests there was more evidence of positive change at the conference. He reiterates Japan Equity Strategist Masashi Akutsu view that 2025 will be another leg higher in Japan's equity story as inflation helps drive higher wages, efficiencies and corporate transformation. Semiconductors could help Japan equity returns as Mikio Hirakawa believes Japan's semicap test equipment have and will benefit from AI-related demand for GPUs and memory.   You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.   "Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. ©2024 Bank of America Corporation. All rights reserved.

Wednesday Oct 16, 2024

The persistent pursuit of megawatts; meeting today’s energy demand

Demanding investment in the grid and generation US electricity demand growth in 2024 has run at a faster pace than GDP. This follows a decade in which demand hardly grew. And while data centers are an important driver of this recent growth, there are other, more important factors, namely building electrification. Reshoring and electric vehicles have also been a boost. The point is that the factors behind this growth are many, meaning that a slowdown in one area isn't likely to derail what should be years of increasing power needs. Our analysts discuss the challenges that nuclear faces in meeting US demand needs, the role of natural gas and the capital equipment that will be needed for both the grid and data centers. We also discuss the importance of renewables and how limitations keep them from being an around-the-clock baseload power solution anytime soon. Renewables do raise grid complexity and power price volatility, a benefit for the companies offering solutions.   You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.   "Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. ©2024 Bank of America Corporation. All rights reserved.

Monday Oct 07, 2024

Pleasant views from the Global Real Estate conference

A ready-mix of positives for real estate Last month, BofA hosted its annual Global Real Estate conference with record client attendance. Jeff Spector suggests that while investors have been underweight real estate the last couple of years as rates rose, recent outperformance is beginning to draw investors into the group. The fall in rates make REIT yields look more attractive, all else equal, and also come with a number of fundamental positives which we discuss within. REIT executives at the conference see the market for real estate transactions picking up, historically a positive for REIT valuations. And office, aside from being a particular beneficiary of rate cuts, received some positive commentary from real estate executives. Return to office mandates are leading to improvement in certain key US markets including Midtown Manhattan, which is presently one of the strongest office markets in the country. Also, high rates and pessimism on the part of developers in areas including office and retail has meant supply is muted.   You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.   "Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. ©2024 Bank of America Corporation. All rights reserved.  

Friday Oct 04, 2024

Rate cuts are underway but home buyers await more

Lower rates will drive home turnover and housing stocks Mortgage rates have dropped by more than 100bps since last fall and housing stocks have responded. But while lower rates should in theory be good for demand, signs of improvement are modest so far. Many buyers remain on the sidelines as they await a further drop in rates. On the supply side, the new rate regime should reduce lock-in and allow more existing homes to come to market. This might seem to balance the increased demand, but Rafe Jadrosich also points out that home sellers usually become buyers. Plus, lower rates could drive the many high-income renters into the housing market. A pickup in transactions and housing turnover should benefit building products stocks from a cyclical standpoint. And some of these products also benefit from secular tailwinds.   You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.   "Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. ©2024 Bank of America Corporation. All rights reserved.

Friday Sep 13, 2024

Rate cuts to boost some construction segments with a lag

Construction spend strong on structural tailwinds Construction spending, excluding housing, is running at a rate of about $1-$1.2 billion annually, near record levels. Much of this spend is driven by recently passed legislative acts, according to Mike Feniger. But reshoring and AI are also having significant positive impact and the annualized capex for big tech has increased from $138 billion to $229 billion in just a year. Still, despite the headline strength, there are areas of construction which are weak, including warehouses, retail shopping centers and private office. The number of mega projects is slowing. Rate cuts and election certainty could be a catalyst for some of these lagging areas. Typically, housing benefits from rate cuts first and commercial construction sees a boost 1-2 years later but a lack of overcapacity in commercial construction could mean that there's less of a lag this time. Mike believes that large equipment rental companies are likely to benefit from this improvement, a view he discusses within. You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.   "Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. ©2024 Bank of America Corporation. All rights reserved.

Wednesday Sep 04, 2024

The AI evolution could become a revolution

GenAI: Coming Soon to a Sector Near You Alkesh Shah views Generative AI (GenAI) as the beginning of the third major tech cycle of the past 50 years. Over the past 10 years, development of more powerful chips and a new neural network architecture has raised the upper bounds of storage and computation exponentially, consequently reducing the time and cost to train increasingly large models powering apps like ChatGPT. Alkesh expects GenAI to catalyze a revolution in corporate efficiency and productivity that will occur far more rapidly than past disruptive technologies, which investors anticipate. Alkesh surveyed 157 equity analysts and macro strategists on AI's financial and economic disruption. Survey responses indicate that enterprise AI implementation could boost S&P operating margins by 200bps over the next five years. AI beneficiaries will likely expand from Semis and Cloud Service Providers in the first wave; Tech Hardware, Software and Capital Goods in the second wave; and ultimately touch every sector globally.    You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.   "Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. ©2024 Bank of America Corporation. All rights reserved.

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The AI evolution: Reality justifies the hype

As AI sparks efficiency, BofA Global Research says it will have positive financial impact on 75% of companies in the next 5 years.

Vanessa Cook

November 2023

Key takeaways

• The newest wave of artificial intelligence — generative AI — will likely catalyze a corporate efficiency and productivity evolution that touches every sector globally over the next 5 to 10 years. Past disruptive technologies emerged over 15 to 30 years, but AI-driven efficiencies and revenue may appear as soon as the next 3 to 5 years — a faster pace than many expect.
• A survey of over 100 BofA Global Research equity analysts on AI's financial impact for the 3,500 companies covered globally found that analysts expect that three-quarters of covered companies will experience mild-to-strongly positive AI-driven financial impact over the next five years and 60% will implement strategies targeting operational efficiencies, followed by revenue enhancement (29%) and transformation (5%).
• The survey also found that AI implementation strategies are expected to drive operating margin expansion across 24 of 25 industry groups over the next five years with Tech Hardware (+5%), Telecom (+5%) and Semis (+5%), most likely to experience the largest operating margin expansion. However, while the transformative nature of the newest AI wave is clear, it's impossible to foresee the long-term implications of this nascent technology.

Read our full analysis for a more in-depth look at these trends.

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