BofA’s Subramanian Says Reasons to Be Bullish Are ‘Pretty Thin’

(Bloomberg) — As evidence of peak inflation emerges, many on Wall Street are getting bullish. Not Bank of America’s Savita Subramanian.

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Equity bulls, it seems, are simply trying to justify the rally from June’s nadir, Subramanian, the bank’s head of US equity and quantitative strategy, said on Bloomberg Television Thursday.

“What we are all looking for are reasons to get more bullish, but the reasons are pretty thin if you ask me,” Subramanian said. The two most common arguments she hears are inflation having reached its peak and the better-than-feared second-quarter corporate earnings.

While inflation may have peaked, consumer prices rose to 8.5% in July, decelerating by more than expected, it is still way above the Federal Reserve’s target, she said. Further, the stronger-than-expected jobs report, which was widely interpreted as a positive for a soft landing and for consumer health, is not that positive, she added.

“I see that as overwhelmingly negative because what that means is pricing power for the average corporation is starting to wane,” Subramanian said. “Demand is starting to wane. But wages, which are the biggest depressant on corporate margins for the S&P 500 are sticky and high. Why are we celebrating about this? I just don’t get it.”

In fact, Subramanian said she is confounded by the attention inflation receives. What matters more is the long end of the yield curve. The 10-year Treasury yield remained near 3% on Thursday.

“What’s bizarre to me is this laser focus on inflation prints on a monthly basis and real-time reads on inflation and what’s the Fed going to do,” she said. “All of that is second to what happens to the long end of the curve. I like that phrase ‘complexity of the moment’ because I think this is a very complex moment for equities.”

The market remains vulnerable to even a slight increase to companies’ cost of capital.

“The duration of S&P 500 is still above 30 years. We are looking at 30-year, zero coupon bond,” she said. “What that means is that a mere 50 basis point change in the cost of equity capital, which is more influenced by the long-end, could drive the market either really high or really low from here.”

Read more: Treasuries Gain, Halting Rout That Sent Yields Toward 2022 Highs

While companies fared better than expected in the second quarter — with the S&P 500 growing sales by 15% — most of that was driven by one sector.

“Energy grew sales by 80%, everything else was fairly lackluster,” she said. “More companies in the S&P 500 undershot inflation in sales.”

Data from the bank published on June 15 show that just 53% of S&P 500 companies “had sales growth that cleared inflation.”

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