The biggest themes stock investors should be watching as bearish headwinds swirl

• Bank of America strategists listed themes investors should be monitoring amid bearish headwinds.
• De-globalization, inflation and climbing borrowing costs all present looming risks.

With the US economy and markets staring down a cocktail of bearish headwinds, Bank of America broke down the major themes investors should monitor, and why there are still reasons for optimism.

In a note to clients Friday, strategists led by Savita Subramanian and Ohsung Kwon pointed to de-globalization, inflation, and the rising cost of capital.

"The economy endured a global pandemic and has since seen the fastest spike in rates, two wars break out, inflation triple and then halve, soaring fiscal deficits, rampant labor strikes – until AI takes all of our jobs, that is," they said. "Consensus long-term growth expectations for S&P 500 earnings have dropped to record lows, a rather powerful contrary indicator."

A shifting global landscape

Bank of America said de-globalization can be bearish for margins, as it limits opportunities for cost, labor, and tax arbitrage.

But US corporations have already been weaning off China since 2017, and margins have held steady. China's reduced role in trade with the US, for example, has been plugged by imports from Mexico and Canada.

At the same time, the US has pushed Big Tech to move certain production mechanisms back to American soil.

"This is bullish for some stocks via capex, jobs, consumption, and less exposure to slowing regions," the Bank of America strategists said, adding that pivoting to energy independence also looks encouraging for the economy.

Inflation

It's up in the air whether inflation will stay sticky or fluctuate, as recent years have seen stagflation, hyperinflation, deflation, and re-inflation, according to the bank.

Strategists differentiated between stocks that could see returns in scenarios of high versus low inflation.

Among S&P 500 companies whose performance shows a strong positive relationship with BofA's inflation composite, names in commodities led the way, including Freeport-McMoRan, Mosaic, and Devon Energy.

Those that showed a negative relationship were mostly consumer-facing names, including Amazon, Best Buy, O'Reilly Automotive, and Clorox.

The end of easy money

Bank of America cautioned that central bank rate hikes have "roiled cost of capital assumptions." Up until recently, some companies have over-earned on cheap debt and free money, while others have under-earned amid a lack of capital in certain sectors, strategists said.

Rising borrowing costs pose a bearish risk for earnings growth, but it might see improvement from labor efficiency and artificial intelligence, according to the note.