Must Read Research
Also featuring commentary from Global Economic Weekly
April 13, 2025
Candace Browning, Head of BofA Global Research
Directions matter more with volatility in the driver’s seat. This week, we track how de-dollarization could reshape the global road map, why corporate guidance is key to keeping the S&P 500 on course, how reduced regulation could offset climbing tariffs, and we launch coverage of the U.S. Business Services sector.
Weakness in the dollar and the “fire sale” in U.S. Treasuries has led to questions about the role of the U.S. dollar as the reserve currency.
Recent dollar declines come at a time of twin U.S. deficits, inflation and trade uncertainty but some de-dollarization has been occurring for years. As a percentage of FX reserves, the dollar has declined from 66% in early 2015 to less than 58% as of 3Q24. We witnessed sharp Treasury selling pressure from China in the second part of Trump’s first term, when trade policy and tariffs became more of a focus. The USD continues to dominate payments and trade but the rise in CNY payments is noteworthy. The FX team expects further weakness in the USD and the commodity team points to gold as the great beneficiary. 2024 was another year of heavy central bank buying of the gold and central bank purchases accelerated in Q4. China has been one of the biggest official buyers.
Company guidance will be paramount during the 1Q earnings season.
Head of U.S. Equity and Quantitative Strategy Savita Subramanian expects 8% year over year (y/y) growth in S&P 500 EPS (earnings per share), with 7 of the 11 sectors expected to see higher y/y earnings, up from five last quarter. But beats and misses may not move the needle much as the impact from tariffs remains unclear. Companies tend to offer less guidance as uncertainty rises—during Covid, only 10% issued annual guidance in 2Q20, down from 40% in the four quarters before. (Firms that withdrew guidance underperformed peers by ~3ppt (percentage points). Tariff implementation is a key overhang. Savita estimates a 15% hit to earnings based on the direct impact from China tariffs and retaliation. Lower GDP (Gross Domestic Product) could also weigh on earnings. Historically, every 1ppt drop in U.S. real GDP has meant EPS falls 5-6ppt, all else equal. Despite these risks, Savita still favors value stocks over growth, with a 5,600 S&P 500 target for 2025.
Deregulation was a major theme for stocks heading into 2025, but has been overshadowed by tariffs.
Senior U.S. Multi-Industry Analyst Andrew Obin notes that regulatory costs for U.S. manufacturers rose from 3.4% of revenue in 2008 to 5.3% by 2023. He believes resetting the regulatory burden to pre-Biden era levels could offset tariff-driven price increases. Deregulation is a key priority for the Trump administration—the "Unleashing Prosperity Through Deregulation" Executive Order signed on January 31st requires 10 regulations to be eliminated for every new regulation issued. Andrew thinks investors may be underestimating the degree of deregulation already underway, though changes may not be clear until 2026. The Environmental Protection Agency (EPA) has been most active, announcing 31 deregulatory actions in a single day. This is particularly important for U.S. multi-industrial stocks, as environmental compliance costs are the largest regulatory burden.
We initiate coverage of the U.S. Business Services sector.
Defensive growth is a hallmark of the group, with many companies having networks that enable insulation from competition, pricing power and compelling operating leverage according to Senior U.S. Business & Information Services Analyst Josh Dennerlein. Furthermore, drug distributors may be even more defensive. In a separate report Healthcare Technology & Distribution Analyst Allen Lutz suggests that tariffs and a smaller FDA (Food & Drug Administration) could mark the beginning of a new golden age for generic drug inflation. We estimate every 1% increase in generic pricing translates to a 1% increase in EPS (earnings per share) and a smaller FDA.
Must Read Research returns the week of April 27th after the holiday. Happy Easter!
Claudio Irigoyen, Head of Global Economics, BofA Global Research
President Trump spares electronics from tariffs, big relief for China and supply chains
Over the weekend, the Trump Administration temporarily exempted many electronic products, including smartphones and computers, from "reciprocal" tariffs. If our understanding is correct, imports of these products from China would only be subject to the initial 20% tariff imposed by the administration, and imports from other countries would be subject to roughly zero tariffs. In 2024, computers and electronics made up approximately 17% of total U.S. imports, but semiconductors were already exempt. The new exemptions affect around $100 billion of imports from China, and ~$200 billion of imports from the rest of the world. The new exempt goods make up more than 20% of imports from China, so a reduction in tariffs of 125pp (percentage points) in these alone would lower the effective tariff on Chinese imports by about 30pp. We stress that supply chains are highly dependent on China in this sector, so the news also brings relief to global supply chains, at least in electronics-related sectors.
The new effective tariff rate would land around 20%
Elsewhere, the reduction in tariffs after the 90-day pause is of 10pp. The exemptions reduce the U.S. effective tariff rate by almost 5pp, of which roughly 80% are explained by China. With the new exemptions, and without accounting for any substitution effects, the U.S. effective tariff rate would land close to 20% (vs 25% after the China escalation and 20% after April 2). The more tariff backtracking, the better for the U.S. and global outlook. We remain of the view that the U.S. and global economy will pay a price for the uncertainty shock in at least a moderate slowdown. But such slowdown could be milder and shorter-lived if tariff uncertainty dissipates quickly. For the U.S., we think the exemption of computers and electronics limits upside risks to inflation and downside risks to growth by about 0.5pp, making a 1%-handle growth possible with core PCE (personal consumption expenditure) around 3.5%.
