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The tactical and strategic case for defense stocks
The US spends about 2.8% of GDP on defense. And although overall US budget deficits are rising, which could affect other areas of spending, Ron Epstein believes defense spend is likely to rise, potentially to 4% of GDP or more. And part of this will fund greater innovation as the US will have to stay ahead of adversaries. But it's not just about ordering more equipment, Ron suggests that the industrial base for submarines, which are a key area of focus for the Department, is smaller than it needs to be. There were six years after the Berlin Wall came down where the US didn't build any new submarines and the industrial base, from workers to supply chains, must be bolstered. An increase in defense spend and innovation should translate positively for defense stocks which also tend to do well during US presidential election years. In fact, going back to 1980, defense stocks on average outperform the S&P by over 13% in those years with performance weighted toward the second half of the year.
 
You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.
 
"Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities.
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Productivity gains from AI will drive margin growth
The S&P 500 has enjoyed double digit gains this year thanks in part to waning recession concerns and a resilient consumer that has been somewhat insulated from higher interest rates. We sit down with Head of US Equity and Quantitative Strategy, Savita Subramanian, who remains bullish on US equities from these levels. Savita believes that in this backdrop of high inflation, wage growth and interest rates, companies will likely focus more on efficiency, a positive for earnings and the multiple the market would be willing to pay. And when excluding the seven stocks that have driven the S&P so far this year, the S&P earnings multiple looks more reasonable anyway. AI should help in this push for productivity.
You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life.
 
"Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, trading, research, strategic advisory, and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including, in the United States, BofA Securities, Inc. a registered broker-dealer and Member of FINRA and SIPC, and, in other jurisdictions, by locally registered entities.
©2023 Bank of America Corporation. All rights reserved.