Stocks have yet to fall further, especially on a key indicator, according to Bank of America’s Savita Subramanian. The Rule of 20 is one of the indicators Subramanian watches to gauge the bottom of the market. According to a note on Wednesday, the rule, which is the sum of year-over-year consumer price inflation plus price trailing earnings, has been below 20 at previous market lows. Currently, that number is 28.5, according to Bank of America. Lowering it below 20 would require either inflation to fall dramatically or the stock to see a significant decline (lowering its P/E ratio) or earnings to grow exponentially. “Absent inflation falling to 0%, or the S&P 500 falling to 2500, it would take a 50% earnings surprise to meet the Rule of 20, while the consensus calls for an aggressive, unbundled growth rate of 8 % by 2023 already,” Subramanian wrote. Other Indicators Beyond the 20 rule, which has a perfect track record, only 30% of the indicators that Bank of America follows to signal a bull market have flashed green. In past market bottoms, at least 80% of these signals have been triggered. Other milestones that have yet to fire include the Fed’s rate cut, rising unemployment and a more than 50 basis point drop in the 2-year US Treasury yield. Just as troubling for the moose is that stocks are now relatively expensive given the S&P 500’s 17% rally since the June low. Still, the summer advance is likely just a bear market bounce, according to Bank of America. Bank of America sees only a 20% chance that a recession will be priced into the market when measuring the equity risk premium. That’s down from a 36% chance in June and a 75% chance in March. While markets appear to be betting on a soft landing, it may be too early to discount a hard one. Against this backdrop, Bank of America says investors should buy energy and industrial stocks and offload shares of consumer staples and consumer discretionary companies.
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