‘Stars are aligning’ for cyclical stocks: BofA

Bank of America analysts are optimistic about the outlook for cyclical stocks, highlighting favorable economic conditions and easing inflation pressures as key drivers for a potential rotation in the market.

The bank says last week’s inflation data, which missed economists’ estimates by a significant margin, marked a crucial turning point. According to BofA, this development “confirmed our thesis that we’re on the path to goldilocks, with macro and inflation back in sync.”

This alignment is seen as crucial because it allows the Federal Reserve to shift its focus more decisively towards supporting economic growth rather than solely combating inflation.

BofA noted Federal Reserve Chair Powell’s recent comments to Congress, emphasizing that “elevated inflation is not the only risk we face.”

The analysts pointed out that with inflation pressures easing, the conditions are ripe for a rotation into rate-sensitive cyclical stocks. They highlighted that “the stars are aligning” for this sector, with reduced rate pressure and broadening earnings across various sectors contributing to the positive outlook.

Bofa’s assessment includes expectations for a strong showing in second-quarter earnings, projecting a typical 2% earnings per share beat.

Looking ahead, BofA remains cautious about potential market volatility, particularly after sharp movements following the CPI data release. They recommend strategies like outperformance calls in derivatives to hedge against such risks, emphasizing the importance of navigating earnings season strategically with options.

Overall, BofA’s stance reflects confidence in the resilience of cyclical stocks amidst evolving economic conditions, expecting them to benefit from supportive Fed policies and improving earnings fundamentals in the coming quarters.