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Inflation cooling toward the Federal Reserve’s target along with signs of the U.S. economy moderating are forming an ideal environment for interest-rate sensitive cyclical stocks, Bank of America said.
The June Consumer Price Index inflation report released last week showed month-over-month and year-over-year headline inflation rates slowing faster than anticipated. Bank of America in a Sunday note said the headline miss was the biggest in its data history since 1998.
“This confirmed our thesis that we’re on the path to goldilocks, with macro and inflation back in sync,” after more than two years of divergence, Ohsung Kwon, equity and quant strategist at BofA, said.
Kwon said tamed inflation means monetary policymakers can solely focus on economic growth after they pushed up their key interest rate from zero to 5.25%-5.5% during 2022 and 2023. “The stars are aligning for the rotation into rate-sensitive cyclicals: rate pressure is easing, growth would ultimately be supported by the Fed, and most importantly, earnings are broadening out as the ‘Other 493’ comes out of an earnings recession,” Kwon said.
The bulk of the so-called Magnificent Seven group of stocks – (NVDA), (META), (GOOG), (AMZN), (MSFT), (AAPL), (TSLA) – have been major drivers throughout 2024 of the +18% surge in the S&P 500 (SP500)(SPY).
The CPI report put inflation closer to the Fed’s 2% goal, and investors have been pricing in expectations for the Fed to jumpstart rate cuts as early as September. The world’s largest economy is moderating but “not rolling over,” a view that’s likely to evolve with data releases, BofA said.
BofA did not name any cyclical stocks specifically. Sectors generally considered highly correlated to economic phases include consumer discretionary (XLY), materials (XLB), and financials (XLF). Each of those sectors on the S&P 500 (SP500)(IVV)(VOO) are higher YTD, but behind the overall index’s advance.
Some ETFs focused on consumer discretionary stocks are (FDIS), (FXD), (VCR) and (RXI).
