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Time to ‘buckle up’ as ‘inflation’ mentions soar during earnings calls, BofA warns

Investors may want to “buckle up” as companies signal inflationary pressures in an earnings season that’s heading into its busiest week, according to research from Bank of America Corp.

The number of mentions of “inflation” during earnings calls of companies included in the S&P 500 index
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has more than tripled year-over-year per company, the biggest jump since 2004, BofA Global Research said in a note Monday. Historically, the tally “has led CPI by a quarter with 52% correlation and points to a robust rebound in inflation ahead,” BofA’s equity and quantitative strategists warned in the report.

The strategists said raw materials, transportation and labor were cited as “major drivers” of inflation during the calls. Many companies plan to raise prices because of the higher costs, or have done so already, with inflationary pressures noted in sectors including consumer, industrials and materials, according to the note.

“The question it really comes down to is, ‘how quickly does the baton get passed from some of the shorter-term inflation to longer, more substantial inflation coming from the labor market and from wages?” Victoria Fernandez, chief market strategist at Crossmark Global Investments, said in a phone interview Monday. “Perhaps it’s a little bit quicker than people anticipate if we don’t see workers come back to the workforce.”

Market volatility may well pick up as investors fear the Federal Reserve could fall “a little behind the curve” on inflation by having “such a dovish stance,” according to Fernandez. Still, she expects any spikes in inflation over the next few quarters, including in areas such as commodities, will be relatively short-lived as the economy reopens in the pandemic
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“True longer-lasting inflation typically comes from wages,” Fernandez said. 

Meanwhile, companies’ earnings generally have been meeting or surpassing expectations in the first quarter, she added. That’s giving support to stock market valuations that many investors have worried are stretched. 

“You have to be careful where you’re buying your names,” said Fernandez. 

Crossmark is favoring areas in technology away from the “high-flying tech names,” including stocks tied to data infrastructure and internet businesses that have good growth potential over the next couple years, she said. For example, Crossmark likes Adobe Inc.
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and Nvidia Corp.
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Fernandez added.

Read: Should you buy Nvidia stock? Here are the key numbers to look at now

More than 100 companies in the S&P 500 index have reported their earnings for the first quarter, with this week marking the busiest of the season, according to the BofA report. The S&P 500 is up 11.5% this year based on early afternoon trading Monday.

BofA strategists use natural language processing to analyze earnings transcripts in order to gauge sentiment and inform their stock picking preferences.

“Corporate sentiment has jumped to an all-time high so far this earnings season,” the strategists said in their note. “This corroborates our preference for cyclicals/value over defensives, which have historically outperformed when this measure has improved.”

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