BofA to Clients: Watch Earnings and the Fed, Not the Election

BofA: Watch Earnings and the Fed, Not the Election In a new research note, Bank of America's Head of U.S. Equity and Quant Strategy, Savita Subramanian, directs market participants to focus on corporate earnings and Federal Reserve policy over the political cycle. The call asserts that fundamentals, not election outcomes, are the primary driver of US equity performance. ## Background The S&P 500 has advanced despite persistent investor debate over the impact of the upcoming US elections. Historically, election years can introduce volatility as market participants attempt to price in different policy, regulatory, and tax outcomes. Common wisdom suggests that uncertainty typically acts as a headwind for risk assets until the results are clear. Subramanian's analysis counters this narrative by elevating two other factors: corporate earnings and central bank policy. The market's recent performance has been tightly correlated with expectations for earnings per share (EPS), a company's profit divided by its outstanding shares. At the same time, the Federal Reserve's interest rate path has directly influenced equity valuations, or the multiple investors are willing to pay for a dollar of earnings, by setting the economy's baseline cost of capital. ## Why it matters The BofA note serves as a discipline check for investors. It suggests that capital allocated to hedging specific electoral outcomes may be less productive than capital allocated based on fundamental analysis of corporate health and the direction of interest rates. If the thesis holds, the market's primary trend will be dictated by the strength of corporate guidance—a company's own forecast for future performance—and the Fed's success in managing inflation without stalling the economy. Portfolios positioned heavily around a specific electoral outcome are on the wrong side of this call. Subramanian's argument implies that sector and factor bets should be based on earnings power and sensitivity to interest rates, not which party controls Congress or the White House. The read-through is that the S&P 500's trajectory depends more on its constituent companies' ability to generate cash flow than on Washington's political churn. ## What to watch The validity of this 'fundamentals first' thesis will be tested during the first-quarter 2024 earnings season and by the Federal Open Market Committee's forward guidance. By April 30, 2024, if the market's reaction to major earnings beats and misses, along with Fed commentary, demonstrably outweighs its reaction to political polls and headlines, the BofA view will be validated. The thesis would be challenged if strong corporate fundamentals are met with market weakness specifically attributed to rising electoral uncertainty.