Signals & Noise: Earnings Over Elections

Strategic Outlook & Midterms:

• Savita Subramanian, Head of U.S. Equity and Quant Strategy at B of A Global Research, recorded this analysis on September 29, 2026.
• Midterm election outcomes are characterized as "noise" relative to earnings; gridlock is viewed as the optimal market state, while a Democratic sweep would likely trigger a temporary sell-off in commodities or tech.
• Policy deregulation is not seen as a risk to Energy and Materials companies, which maintain production discipline and cash return focus.
• Utilities have already priced in policy risks, and healthcare sector exposure is deemed resilient to expansive social policies like Medicare for All due to lighter industrial positioning.
• AI CapEx remains the dominant trend, with bipartisan support for maintaining U.S. tech primacy despite rhetorical concerns.
• Data center investments are geographically concentrated in Republican-leaning states, insulating the trend from partisan shifts.

Valuation, Inflation, and Price Targets:

• The primary risk to growth stocks is identified as higher inflation and long-term rates, which increase discount rates and compress multiples.
• Year-end S&P 500 outlook was raised from 7,100 to 7,400, reflecting earnings growth outpacing price returns.
• Current market multiples imply lower near-term inflation than expected, creating a temporary entry point for buyers.
• The 12-month S&P 500 outlook projects a level of 7,800, representing a marginally higher return than current levels.
• Earnings growth is projected to slow from approximately 35% this year to 15% next year, shifting the focus from earnings magnitude to quality.
• Ten-year treasury yields at 5% are considered attractive relative to other asset classes given long-term stock return models projecting near-zero index returns.

Asset Allocation & Fixed Income:

• Long-term bonds are upgraded to a position of interest for the first time since the 2010s zero-interest rate environment.
• The yield ratio of long bonds to dividend and earnings yields has reached 20-year highs, signaling an unusually attractive entry point.
• Long bond allocations are at four-year lows, creating a crowded short position that contrasts with $8 trillion in cash holding negative real yields.
• Stable 10-year treasury yields are anticipated in the medium term as the Fed implements rate hikes until inflation subsides.
• Equities are deemed capable of handling 5%+ rates because the current rate drivers—growth, productivity, and deregulation—are fundamentally equity-positive.

Sector Moves & Technology:

• Communication Services were upgraded to market weight due to better macro/micro conditions and the recent derating of risks; previously downgraded to underweight in mid-2025.
• Information Technology was raised to market weight, balancing the previous "sell CapEx spenders, buy CapEx takers" thesis as risks are now largely priced in.
• Hyperscalers have executed capital raises at low interest rates while credit spreads were narrow, positioning them well for rising rate environments.
• A specific growth catalyst is identified for late 2027: cloud sales are expected to overtake AI spending.
• Productivity gains continue to drive margins for communication services, validating the core thesis that has largely played out over the last two years.

Forward-Looking Statements:

• Large-cap value is identified as the sector with the most exciting potential for returns and leadership.
• The long-term bull case relies on productivity and AI adoption rather than multiple expansion.
• Market participants are advised to wait for better entry points over the coming months as multiples compress.
• The firm maintains a preference for stocks with positive gearing to nominal growth over bonds and cash, despite the renewed attractiveness of fixed income.