Bank of America has identified a rare and ideal environment for the stock market to thrive, where earnings are on the rise while economic growth is slowing down. This situation, which has only occurred 11% of the time since 1950, has historically led to significant gains for stocks, according to the bank.
The analysts at Bank of America highlighted that during this unique scenario, the S&P 500 has historically seen average quarterly returns of 3.6% with a win ratio of 79%. Conversely, when earnings growth is falling and the economy is growing, average returns drop to 3% with a win ratio of 63%. Additionally, when both earnings and economic growth are declining, the returns decrease to 2% with a win ratio of 62%. On the other hand, when both the economy and corporate profits are increasing, the average return is 2% with a win ratio of 69%.
Furthermore, Bank of America projects that GDP growth will be revised downward as economic activity slows down and the labor market weakens. Simultaneously, the bank anticipates that corporate profits will continue to grow, with earnings per share increasing by 3% over the last 12 months. Historical data has shown that a combination of slowing GDP growth and rising earnings per share has been the most favorable macroeconomic environment for stocks.
The bank emphasized several factors that should support this unique scenario: firstly, there is an ongoing recovery in manufacturing conditions; secondly, companies have considerable operating leverage to capitalize on; thirdly, gross margins are expected to increase; fourthly
