Guru watch

Savita Subramanian, head of US equity strategy, Bank of America

“I think we’re in an environment where allocation to stocks is just starting to increase,” says Savita Subramanian, one of Wall Street’s topranked strategists. “Bullishness is just starting to percolate a bit.”

Investors worry about the risk of the US Federal Reserve keeping rates high, but the prospect of monetary policy staying tight because the American economy is “running too hot” doesn’t have to be a bad environment for stocks.

Over the past couple of years we’ve seen high inflation alongside a rapid upward move in rates, and yet this hasn’t derailed the rally, she tells Bloomberg.

“It’s certainly derailed parts of the spectrum… commercial real estate… parts of the private markets and the less liquid areas. But we haven’t necessarily seen it play through to your average cash-rich company sitting [in] the S&P 500.”

Profit margins have held up better than expected despite high volatility in costs. The labour market remains strong. Consumer spending hasn’t slowed down meaningfully. Overall, we have plenty of evidence to show the market can cope with rates at 5%.

There’s also more clarity about earnings than there was a couple of years ago, adds Subramanian. Many companies were generating growth in earnings per share through debt-funded stock buybacks. “That’s not a great, high-quality source of earnings growth.” And globalisation was helping boost profits through cost arbitrage and tax arbitrage. “All of these easy kind of lower-quality manoeuvres are behind us… and we’ve still seen that companies are able to adapt.”

The bull case from here depends on a “very strong productivity cycle” – and there is good reason to be optimistic. “Companies are now focused on productivity. They’re spending money on AI. We’ll see if it works or not. But there is this promise that a lot of the more labourintensive companies in the S&P 500 can become labourlight very quickly.”