Investing.com – After greeting Trump’s election with a sharp rise and new records, US stock indices weakened last week, as initial euphoria gave way to awareness that many risks still loom the economy and markets.
Indeed, Bank Of America analysts highlighted in a recent note 3 key risks which could weigh on corporate profits and lead to a violent correction of the stock markets.
Analysts first highlighted the risk of an economic recession, which they believe could significantly reduce profit growth, to the tune of 10 to 20% for S&P stocks.
Clarifying that a recession is not their base case scenario, BofA analysts said it will depend on what policies the new Trump administration prioritizes.
Notably, they believe that recession will become much more likely in a scenario where Donald Trump imposes draconian immigration restrictions and protectionist trade policies amid minimal fiscal easing.
On the other hand, BofA also sees opportunities for explosive growth if the president-elect deemphasizes trade and immigration restrictions in favor of tax cuts and deregulation. In this case, GDP growth could even exceed 3% in 2025 according to them.
The second risk highlighted by BoA concerns possible retaliatory tariffs, if Trump’s plans for universal customs duties come to fruition. This is a 10% impact on S&P company profits that analysts expect.
Remember that Trump pledged during his campaign to apply a 10% customs duty on all foreign imports into the United States, except those from China, which would be taxed at 60%.
If Trump stays true to his word, BofA expects U.S. foreign sales to take a 3% to 4% hit as the rest of the world implements its own tariffs in retaliation.
In the escalating trade war, industrial stocks and semiconductors would be most at risk, according to the bank.
Finally, Bof A highlighted the potential impact of a dramatic rise in bond yields, which could reduce earnings per share by an additional 10%.
BofA’s worst-case scenario would be for the 10-year Treasury yield to reach 7%, a situation that could occur if Trump’s tariff and immigration cuts cause an inflationary shock.
