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Bank of America listed three risks that could hit corporate earnings growth, a key driver of stock returns.
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One potential headwind is Trump’s proposed pricing plan, BofA said.
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The company is also keeping a close eye on bond yields, which have soared since the election.
The stock market is done drive high since Donald Trump won the presidential election.
One of the main reasons for this is that investors are pricing in strong earnings growth in the future, which is seen as a direct byproduct of Trump’s plans to cut corporate taxes and relax regulations.
Although Bank of America‘s year-end goal for the S&P500 slightly above current levels, new research from the company’s equity strategy team has uncovered three developments that could derail the ongoing earnings-per-share upcycle that is driving profits.
First, an economic recession could significantly undermine earnings growth, causing S&P earnings per share to decline by 10% to 20%.
Although a recession in the US is not BofA’s base case, the bank said recession risk is a real possibility under incoming President Donald Trump.
That will depend on which policies the new government prioritises, analysts wrote in a separate note. In a scenario in which Trump implements dramatic immigration restrictions and protectionist trade policies amid minimal fiscal easing, the economy would enter a recession.
Earnings declines of 20% from peak to trough are typical of an average recession. In this scenario, earnings per share would fall to $195-$220 next year.
To be fair, BofA also sees opportunities for tremendous growth if the president-elect de-emphasizes trade and immigration restrictions in favor of tax cuts and deregulation. In this case, GDP growth could even exceed 3% in 2025.
Second, if Trump’s trade plans are implementedretaliatory tariffs could cause a 10% hit to earnings per share.
During his campaign, the president-elect promised to impose a 10% tariff on all foreign imports into the US. That would not apply to Chinese products, which would instead be subject to a 60% tariff.
If Trump stays true to his word, BofA expects US foreign sales to take a 3% to 4% hit as the rest of the world imposes its own retaliatory tariffs.
In the growing trade war, industrial sectors and semiconductor stocks would be most at risk, the bank said.
Third, a dramatic rise in bond yields could drop earnings per share by another 10%.
BofA’s worst-case scenario would be if 10-year Treasury yields rose to 7%, a situation that could arise if Trump’s tariff and immigration cuts caused an inflation shock.
If this were to happen, the rise in interest rates implies that the Purchasing Managers Index would reach 43 by the end of the year.