2021 is a ‘turning point’ for inflation and stock investors should anticipate lower long-term returns as a result, Bank of America says

2021 is a ‘turning point’ for inflation and stock investors should anticipate lower long-term returns as a result, Bank of America says

The lower inflation of the last 40 years that sent interest rates down and stock market valuations higher has reached a turning point, according to Bank of America's chief investment strategist Michael Hartnett.

"We believe we are at a secular turning point for both inflation & interest rates," Hartnett and a team of Bofa strategists said in a note Thursday. "We believe 2020 likely marked a secular low point for inflation and interest rates due to a reversal of deflationary secular factors, fiscal excess, and an explosive cyclical reopening of the global economy creating excess demand for goods, services and labor."

Now, as the economy reopens, vaccine rollout speeds up, and Washington's $1.9 trillion stimulus bill is signed into law, the US could see a jump in inflation, according to the bank.

That jump could impact long-term equity returns. Stock investors who've seen a roughly 10% annual return from recent decades should expect that gain to go down to 3%-5% over the course of this decade, said BofA.

The firm recommends US stock investors focus on value stocks and cyclical stocks against this backdrop. Energy and Materials are the two sectors most levered to inflation, they added. Meanwhile, investors should "be nimble" around secular