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Bank of America: Inventory Cycle Ended, Expect Cyclical Stocks in the US in 2025

AInvestTuesday, Dec 3, 2024 10:40 pm ET
1min read

Analysts at Bank of America Securities said cyclical stocks in the US should do well in 2025.The bank said that in 2022, the US was 9% into its inflation peak, but the rate regime would be higher than in the 2010s, and the current environment looked like the late 1990s to early 2000s, as only a few expensive large stocks accounted for a third of the S&P 500.Savita Subramanian, head of US equities and quantitative strategy at the bank, said she believed there were more opportunities in common stocks than in the index. “We like companies with good cash return prospects, linked to the US economy — large-cap value.”She forecast EPS of $275 in 2025, up 13 per cent year-on-year, compared with 10 per cent growth in 2024.Thomas Thornton, global head of research product marketing at the bank, wrote in a note: “Volume story replaces the story of large tech stocks for the past two years.”In addition, a recovery in manufacturing should drive sales growth of 6 per cent, driving operating leverage in cyclical sectors. Moreover, “2026 is likely to be a year of normalisation, with profit growth near the long-term average of 7 per cent.”Loosening regulation should also benefit cyclical stocks. Thornton wrote that regulation since 2008 had prevented financial stocks from expanding their price-earnings ratios and had limited loan growth at public banks.In addition, analysts expect the inventory cycle to have ended.“Inventory is down year-on-year most in semiconductors and autos, and up most in pharmaceuticals, biotech, life sciences, durable goods and apparel,” Thornton said.After troughs in inventory in 2003, 2001 and 2022, the S&P 500’s earnings grew 6 per cent, 44 per cent and 35 per cent respectively in the next 12 months.Two other factors that have influenced analysts’ optimism about cyclical stocks are the end of election uncertainty and a pick-up in the S&P 500’s capital expenditure cycle, which grew 17 per cent year-on-year in the third quarter — the strongest rate since the third quarter of 2022.“More importantly, S&P 500 and tech capital expenditure accelerated for the first time since 3Q22, up 7 per cent year-on-year (vs +2 per cent in the same period last year),” Thornton said. “Accelerating capital expenditure in non-tech sectors suggests that strong fundamentals may extend to more areas of AI investment.”Finally, analysts expect S&P 500 earnings to expand. EPS growth is forecast to reach a record 96 per cent in the second half of next year.Bank of America analysts recommend overweighting financials, materials, real estate, utilities and discretionary consumer sectors.

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