Must Read Research
Also featuring commentary from Global Economic Weekly
May 18, 2025
Candace Browning, Head of BofA Global Research
To anticipate is to win quietly. This week we share insights from BofA’s Industrials, Transportation & Airlines conference, and company reactions to last week’s tariff reduction. We also explore the promising momentum in LatAm markets, examine the subtle stress building in Consumer Finance, and highlight how forward-thinking investors can strategically approach luxury stocks following their recent rally.
Just days after the reduction in tariffs on Chinese goods, our analysts hosted 98 companies at the BofA Industrial, Transportation & Airlines Conference and gathered valuable insights on the shifting landscape.
Many investors are anticipating a super-stocking phase at the end of the summer, as shippers take advantage of the 90-day delay. However, carriers were divided on the prospects. Interestingly, recent guidance from many transportation companies may prove overly pessimistic as shipments improve with tariff delays. For multi-industry companies, there were puts and takes. Multi-Industry Analyst Andrew Obin saw more evidence of pre-buy activity in 1Q, but about two-thirds of his companies raised list prices around the tariff announcements, so the reduction in tariffs may result in a net margin benefit. Similarly, Machinery companies are positioned to gain from this shift and the anticipated pro-growth policies expected in 2H, including bonus depreciation. Meanwhile, the Aerospace & Defense supply chain continues to improve, and overall airline bookings have been stable, even improving for some of the low-cost carriers.
LatAm is outperforming the world year-to-date and is likely to continue this trend, supported by improving sentiment from favorable political developments, economic activity and monetary easing.
The region’s solid position in global trade, especially in copper exports, lays the foundation for rising valuations and earnings. Most countries are trading at a discount to their 10-year historical average, presenting a compelling opportunity for investors. According to LatAm strategists David Beker and Paula Soto, most LatAm countries are in an easing cycle, with Brazil expected to start cutting rates in December, projecting a significant cut from 14.75% to 11.25% by 2026. Investor sentiment is optimistic; the May LatAm Fund Manager survey indicates that 53% of respondents believe Brazil will outperform. U.S. tariffs present risks, especially for Brazil and Mexico. Other concerns include a potential slowdown in China and fluctuations in commodity prices. Monitoring these dynamics will be crucial for the region’s economic outlook.
The resumption of student loan collections is set to significantly impact the financial landscape as pandemic-era relief ends.
With 42.7 million borrowers totaling $1.6 trillion in debt, student loan debt now makes up 30% of non-mortgage consumer debt, affecting consumer finances, especially in the subprime segment. Consumer Finance Analyst Mihir Bhatia predicts increased challenges for subprime borrowers as the government reinstates collections, including wage garnishment. In the first quarter, 5.6 million individuals were reported newly delinquent, with a staggering 3.2 million classified as deep-subprime, holding credit scores below 620. The Federal Reserve Bank of New York estimates that 1 in 4 borrowers required to make payments are behind. While the resumption may create growth opportunities for student loan refinancing companies, Mihir warns that lenders focused on subprime markets could face increased pressure as their customers navigate financial challenges.
European luxury stocks have rallied over the last week, supported by the macro. Group fundamentals, however, have not improved and Head of the EMEA Consumer Discretionary Ashley Wallace points out that trends have deteriorated versus 1Q25, with Japan tourism turning negative and EU travel also weak.
If the group were to rally another 7%, the sector would trade at around 25x, the top end of its historical valuation range. At those valuation levels, Ashley expects fundamentals to come back into focus, and she cautions that we’re 5% below consensus for 2025. American luxury spend growth deteriorated in 1Q versus 4Q and there’s been no improvement this quarter. Higher-income spend has gotten better but it’s offset by softness in middle and lower income.
Must Reads will be off next week for Memorial Day weekend. We honor all those who made the ultimate sacrifice.
Claudio Irigoyen, Head of Global Economics, BofA Global Research
In a bad mood
The Moody's downgrade of U.S. debt doesn't tell investors anything they don't already know about the U.S.'s fiscal woes. Ratings downgrades are typically lagging indicators: they don't give markets any new information. Moody's was the last of the big three ratings agencies to downgrade the U.S. from triple-A status, following S&P (2011) and Fitch (2023). Our rates strategists don't anticipate forced selling of U.S. Treasuries because the downgrade won't lead to exclusion from any major fixed income indices. But they have been negative on long-end Treasuries due to the deteriorating fiscal situation.
Why now?
In our view, the timing of the downgrade isn't a coincidence. With tax cuts and tariffs hanging in the balance, Moody's appears to be sending a message that it thinks these policy changes will, on net, put the U.S. on an even worse fiscal trajectory. That is, tariff revenues won't fully offset the cost of the proposed tax bill.
A wake-up call for Congress?
The question now is whether this downgrade will motivate Congressional Republicans to pivot to a more fiscally responsible package, with smaller or less front-loaded tax cuts, and/or more spending cuts. In our view, the more likely scenario is that we still get an expansionary tax package. Long-end Treasury yields should continue to reflect concern about the fiscal outlook. But unless there is an abrupt move, the risk is that by the time Washington gets serious about the U.S.'s fiscal problems, tariffs might be the only available lever to meaningfully reduce the deficit.
