Fed policy and a healthy consumer outlook are creating a ‘goldilocks’ environment that points to more upside ahead for stocks, Bank of America says

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• The economy is in a “goldilocks” environment that should create more upside for stocks, Bank of America said on Wednesday.
• A healthy consumer, an accommodating policy of the Fed and the Congress as well as the credit markets are “exactly right”, said the BofA.
• “Given such favorable macroeconomic and political conditions, market history on our side and a more neutral investor positioning, we still prefer US stocks.”
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US stocks should see more uptrend in the second half of the year as the economy enters a “goldilocks” environment, Bank of America said in a statement on Wednesday.

The bank noted that while inflation fears were “too hot” in the second quarter due to over-stimulus and a quick reopening of the economy, growth expectations are now “too cool” as investors fear earnings growth will come this year Will reach climax.

But consumers, credit markets, and Fed and Congressional policies make a “spot on” scenario that will help boost US stocks going forward.

“Consumers are spot on.”

Consumers are sitting on $ 2.5 trillion of excess cash slowly being spent on goods, services and stocks, according to BofA estimates.

“Instead of splurging all at once after the economy reopens, our economists are citing a shift from goods to services with the potential to deflate goods prices in the next year,” said the BofA, noting that today’s savings rate of 12.4% a record high at 40 years.

The bank expects consumers to continue to drive higher spending over a long period of time, rather than a “sugar high” and a subsequent collapse in consumer spending.

“Credit is spot on.”

With massive bank balance sheets parked with the Fed rather than borrowed, there is room for future growth as those balances find their way into the financial system.

“All of this dry powder means the financial system is ready for productivity. If employment stabilizes, the investment cycle will accelerate and lending should pick up shortly afterwards, ”said the BofA.

Greater lending will initially help the financial sector, but higher investment by technology companies should help increase productivity and could put wages under pressure, the press release said.

“Broader, higher quality and more technology-oriented lending to increase productivity is driving us towards quality, EPS growth and banking, with less desire to chase the reflation businesses,” said BofA.

“Congress and central banks are spot on.”

A trillion dollar bill on infrastructure should reduce fear of over-inducement and the need for punitive tax policies. And while the US Federal Reserve has not signaled a rate hike until 2023, “the markets may not price in these changes until 2022,” said the BofA.

After all, a strong start for stocks in the first half of the year is often preceded by another strong year. According to BofA, the S&P 500 had its best start to the year in 23 years.

“Years that start out well tend to end well,” said BofA. Since 1871, the 16 years that started out similar to 2021 are seeing an average return in the second half of 8%, with more upside potential than downside risk, the bank said.

“Given such favorable macroeconomic and political conditions, market history on our side and a more neutral investor positioning, we still prefer US stocks over the rest of the world,” concluded the BofA, adding that any correction in the stock market is seen as an opportunity to high-value Buy stocks with strong earnings growth.

Bank of America

source https://thedailytradingnews.com/fed-policy-and-a-healthy-consumer-outlook-are-creating-a-goldilocks-environment-that-points-to-more-upside-ahead-for-stocks-bank-of-america-says/