BofA strategist warns of ‘significantly lower’ earnings revisions

Bank of America Research Investment Committee Head Jared Woodard joins Yahoo Finance Live to discuss the state of the stock market as China eases its COVID-19 quarantine period, inflation, investor positioning, global earnings, and the outlook for Americans looking to retire.

Video transcript

BRAD SMITH: Joining us now, we've got Jared Woodward, who is the head of the Research Investment Committee at Bank of America. And Jared, particularly here, as we're getting even more insight into where the consumer's confidence, or lack thereof, sits right now, what most notably would you be watching for going into these earnings season, any type of the earnings revisions that you would even be watching out for at this point?

JARED WOODARD: Well, yeah, I'm glad to be with you all. And I think that the most important thing to watch is the fact that provisions haven't come down the way that you would expect, based on historical averages and these kinds of markets. We've been writing about this for investors for some time this year, that historically, when inflation is high, the Fed is hiking, growth is slowing, and conditions in terms of liquidity and investor positioning are getting worse, you tend to see analysts' earnings estimates a bit lower.

But that hasn't happened yet, not in the United States, not globally. And we expect that, based on the macroeconomic data that we've been getting in recent months, just some more data confirming that point Julie just narrated, we would expect to see analyst revisions be significantly negative, actually bringing expectations much lower for profit growth through the middle of this year. Until we see those revisions, until we see a peak in the inflation data, until we see some reason to think that the Fed hiking cycle is at least halfway through its full range, we have a hard time being big believers in any market rally.

BRIAN SOZZI: Jared, you think we're in a recession already?

JARED WOODARD: I don't think we're in a recession. But like many investors, I think that there's a meaningful risk of it in 2023, particularly if we domestically aren't able to get our energy situation, energy production, our energy grid transmission, and then all the inputs for food and for chemicals and for industry, we can't get these things under control, on a sustainable footing, it's hard to see how the United States or any developed country is going to be able to maintain strong economic growth.

We've become too dependent for too long on really unreliable, non-resilient sources of fundamental inputs. And we think that it's going to require a lot more deep thinking and hard work to put our economies on a sustainable footing.

JULIE HYMAN: Jared, it's Julie here. Hi. You guys just put out a big survey and report on retirement, which is obviously a big topic for you guys at the bank. And I'm reminded of that as you're speaking because for the people who are closer to retirement than not, what we've been talking about, what you've just been saying is even more alarming, right, if you're planning on retiring in the next couple of years. So looking at the results of your survey and of the work that you guys did in retirement, what kind of is your message to those folks?

JARED WOODARD: Well, I think there's a few good things to focus on that are actually very encouraging. Maybe the biggest one from our big report on retirement, we've made a trip to Washington, spoke to some key leaders there. And what we've learned is that the SECURE 2.0 Act, an act that's been a little bit under the radar this year, but nevertheless, has broad bipartisan, in fact, almost unanimous support in Congress, would do some really positive things, I think, for retirees, for workers, and actually for the financial markets overall.

I won't go through all the provisions right now, Julie, but the upshot is that if this act passes the Senate-- it's already passed the House by an almost unanimous vote. And we think that it will pass either late this year or early next year. It'll bring a lot of workers into the retirement system who don't have access today to the tune, by our calculation, of up to $180 billion of fresh inflows a year. That's a big number. That's, for context, about a third of the average annual inflows to global investment funds in a given year.

So if the SECURE 2.0 Act passes, and it brings more workers into the system, I think it's going to provide a lot more support for markets in the medium-term. And even in the interim, we see a lot of opportunities for retirees and folks nearing retirement to stay invested because what our survey revealed is that while many people are concerned about prospects for retirement and whether they've saved enough, they're also willing to work hard, to work a little bit longer, and are willing to allocate more capital to markets if and when they get that opportunity.

One interesting result, Julie, I think that surprised us a lot, many workers said that if it would keep Social Security solvent, they'd be willing to work a few extra years, because right now, they don't expect that Social Security is going to get the job done for them. They know that it's important. They're leaning much more on their private retirement accounts, 401(k)s and so on. But they'd be willing to work a little bit longer. And I think there's a little bit of a silver lining there because the Social Security solvency crisis isn't going away. But our data suggests that workers would actually be quite pragmatic about a policy solution.

BRIAN SOZZI: Jared, you talked about in this report, just staying on Social Security, it might be insolvent by 2031. Is that a tailwind for markets?

JARED WOODARD: It's a mixed bag, I think, because on the one hand, when you flag those risks to investors, they obviously don't like that kind of pressure and that kind of risk. At the same time, it does nudge people to lean more on those private retirement accounts, 401(k)s, IRAs, and other kinds of accounts. And in fact, that's what our survey suggests, that people are focused more than ever on making smart investment decisions for retirement.

We asked, if you had more capital that you were going to allocate to retirement today, where would you put it? The number one answer was, not too surprisingly, equities. Number two is actually alternatives. The least likely place folks were willing to put fresh retirement investments was in fixed income.

BRAD SMITH: Jared, just while we have you and kind of bringing this to a circular ending, if you will, consumers right now, they are more pessimistic about short-term financial prospects in the short-term labor market, more pessimistic on that front from the consumer confidence data from the Conference Board here. And then thinking through what we were also just discussing with the number of people that are nearing retirement who are saying, look, I might have to work just a little bit longer, what do you think that shapes up in terms of the broader employment situation going forward?

JARED WOODARD: Well, one of the answers to one of the questions we asked was whether people's work plans and retirement plans had been significantly affected by COVID and the market and the economy situation since then. There wasn't actually a clear stark answer one way or another. It seemed like a pretty mixed bag. It suggests to us that while some folks may have retired early, other folks may be working longer than they had expected to.

On the whole, a lot of households are in pretty decent shape. I think if you look at the broad economic data, including the Bank of America Institute, our data suggests that American households are still in pretty decent condition economically speaking, financially speaking. I think what's most important is that people are able to navigate these markets to stay invested and to avoid short-term decisions that might end up having a more negative effect than anything that happens in the real economy.

BRIAN SOZZI: Jared Woodard, head of the Research Investment Committee at Bank of America, always good to see you. Have a great rest of the week.

JARED WOODARD: Thanks.