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Bank of America cited three risks that could upend corporate earnings growth, a key driver of stock returns.
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One potential headwind is Trump’s proposed tariff plan, BofA said.
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The firm is also keep a close eye on bond yields, which have soared since the election.
The stock market has been riding high since Donald Trump won the presidential election.
One main driver of that has been investors pricing in strong profit growth in the future, seen as a direct byproduct of Trump’s plans to cut the corporate tax rate and loosen regulation.
Although Bank of America‘s year-end target for the S&P 500 is slightly above current levels, new research from the firm’s equity-strategy team laid out three developments that could derail the ongoing “earnings-per-share upcycle” that’s powering gains.
First, an economic recession could significantly undercut earnings growth, drawing S&P EPS down 10% to 20%.
Though a US downturn isn’t BofA’s base case, the bank cited that recession risk is a real possibility under incoming president Donald Trump.
That will depend on which policies the incoming administration prioritizes, analysts wrote in a separate note. In a scenario where Trump pushes dramatic immigration curbs and protectionist trade policies amid minimal fiscal easing, the economy would sink into recession.
Peak-to-trough profit drawdowns of 20% are typical in an average recession. Under this scenario, EPS would drop to $195-$220 next year.
To be sure, BofA also sees chances of blowout 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 implemented, retaliatory tariffs could trigger a 10% hit to EPS.
During his campaign, the president-elect pledged to implement a 10% duty on all foreign imports into the US. That wouldn’t apply to Chinese products, which would face a 60% rate instead.
If Trump stays true to his word, BofA expects US foreign sales to take on a 3% to 4% hit as the rest of the world establishes its own retaliatory tariffs.
In the mounting trade war, industrials and semiconductor stocks would be most at risk, the bank said.
Third, a dramatic upswing in bond yields could slash EPS by another 10%.
BofA’s worst-case scenario would be if the 10-year Treasury yield surges to 7%, a situation that could be prompted if Trump’s tariff and immigration reductions spark an inflation shock.
If this were to happen, the yield jump implies that the Purchasing Managers Index would hit 43 by 2024’s year-end.