Key Takeaways
A Bank of America Corp. strategist is sounding the alarm on resurgent inflation, warning that the Consumer Price Index could breach the 5% level before the November midterm elections, a move that has historically been a grim omen for equities.
"Unless the 0.4% monthly pace of the past six months slows sharply, the CPI will cross the 5% 'Maginot Line' before the vote," Michael Hartnett, chief investment strategist at Bank of America, wrote in a recent report. The strategist noted that risk assets begin to fluctuate when inflation climbs above 4 percent.
The warning comes as recent data shows inflation remains stubbornly high. The consumer price index rose to 3.8% in April, its highest level since May 2023, while wholesale inflation hit 6% on an annual basis, the fastest gain since late 2022. The figures have pushed the 10-year Treasury yield above 4.5%, adding pressure on stocks.
Based on a century of market data, once inflation crosses the 4% threshold, the S&P 500 has posted an average decline of 4% over the following three months and a 7% loss over six months, according to Hartnett's report. This historical precedent suggests a period of volatility and negative returns could be ahead if price pressures continue to build.
In the face of rising prices, Bank of America strategists are advising clients to prepare for both "inflationary boom and stagflationary bust scenarios." In a note, investment and ETF strategist Jared Woodard highlighted several areas expected to benefit from the current environment.
The firm recommends real assets, particularly metals and mining stocks, as well as energy pipeline partnerships. ETFs highlighted include the iShares U.S. Basic Materials ETF (IYM), which is up over 20% year-to-date, and the Tortoise North American Pipeline ETF (TPYP), up nearly 23%. Bank of America is also bullish on uranium, forecasting prices could challenge all-time highs in 2027 and pointing to the Global X Uranium ETF (URA) as a way to play the theme.
Beyond commodities, the strategists touted U.S. and international small-cap value stocks as one of the least expensive trades available. They pointed to the Avantis International Small Cap Value ETF (AVDV) and the iShares US Small Cap Value Factor ETF (SVAL) as potential opportunities.
In an ironic twist, while Bank of America's strategists caution about macro risks, the bank's own stock is being touted by analysts as an undervalued opportunity. Bank of America (BAC) is the third-largest holding in Warren Buffett's Berkshire Hathaway portfolio and is currently trading at just 11 times forward earnings, with a price-to-earnings-to-growth (PEG) ratio of 0.92, suggesting it is undervalued.
The bank's strength is rooted in its deposit franchise, which grew 3% in the first quarter, marking 11 straight quarters of increases. This sticky deposit base allows the bank to maintain lower interest costs and generate higher net interest income (NII), which jumped 9% year-over-year in the first quarter.
This performance led Wall Street analysts to rate the stock a strong buy, with 85% of those covering it holding a "buy" rating. The median price target of $61.50 implies a potential 22% return over the next 12 months, positioning the bank to perform well barring a severe economic downturn.
This article is for informational purposes only and does not constitute investment advice.
