BofA Strategist Says Central Banks Are Locked In High Inflation, Predicts Drop In Stock Earnings

A structurally higher inflation is currently being "locked in" by central banks, which will force the stock market to re-adjust to a new inflation-interest rate regime over the coming years, said Michael Hartnett, chief investment strategist at Bank of America Securities. 

In his latest "The Flow Show," Hartnett highlighted core inflation in major economies remained stubbornly high around 5%-7%, and now has risen above 3% also in Japan. Structurally low unemployment rates are key factors keeping pricing pressures sticky, according to the strategist.

"The world of zero inflation and zero interest rates is fading into distant past," Hartnett says, as a classic balanced equity-bond portfolio is no longer the only way to invest.

One hundred dollars invested in a classic 60/40 equity-bond portfolio — which can be replicated with a 60% allocation in the Vanguard Total World Stock Index Fund ETF VT and a 40% allocation in the Vanguard Total World Bond Market Index Fund ETF BND, would now be worth $121, versus $118 in a less risky "permanent portfolio" comprised of a 25% equal weight in cash, gold, equity and bonds.

No Central Bank Is Truly Looking To Whip Inflation: Hartnett was surprised by the recent posture taken by global central banks, which are either intending to hold rates, as with the Reserve Bank of Australia and the Bank of Canada, or are close to holding rates, such as the Federal Reserve and the Bank of England.

"No central bank is truly looking to whip inflation despite protestations to contrary," he wrote.  Secular core inflation is a reason why U.S. 10-year Treasury yields are struggling to break below 3.5%, the level of the 200-day moving average despite peak CPI, peak Fed rates and impending recession narrative, according to Harnett. 

EPS To Collapse In 2023: BofA Global EPS Model predicts a 16% decline in global EPS growth by this fall. 

Hartnett stated that it was inconsistent for the S&P 500 index to trade at a price-to-earnings (P/E) ratio of 20, which was the average over the past 20 years, indicating that stock valuations will decline.

No "buy signal" was triggered in the BofA Bull & Bear Indicator despite the recent U.S. regional bank run. 

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