The stars have aligned for this segment of the stock market as the U.S. economy enters its “Goldilocks” era, according to BofA

• The outlook for cyclical stocks has never been better, according to Bank of America.

• The bank said the Federal Reserve may refocus its attention on economic growth after the weak June CPI report.

• “The slowdown in GDP and the acceleration in EPS provided the best backdrop for stocks,” Bank of America said.

THE Colder-than-expected June CPI report fuels a “Goldilocks” economy that should benefit a specific sector of the stock market: cyclical stocks.

It depends Bank of Americawho said in a note Monday that with the “inflation box checked,” the Federal Reserve’s focus will shift back to supporting economic growth rather than controlling inflation.

“Headline inflation was 4.2 standard deviations below economists’ estimates, the largest gap in our data history since 1998. This confirmed our thesis that we are on the path to a goldilocks, with macroeconomics and inflation back in sync,” said Ohsung Kwon, a Bank of America strategist.

The bank said it expected a decline in June retail sales data, due out Tuesday morning, which should strengthen the Fed’s stance in favor of a September interest rate cut.

“In addition, industrial production and housing starts should provide insight into economic activity. We believe the economy is slowing, not collapsing, but we expect our view to change based on the data,” Kwon said.

As long as economic growth slows and the Fed begins to cut interest rates, this should present a near-perfect scenario for cyclical stocks that are often found in the materials, industrials, energy and consumer discretionary sectors, as well as parts of the technology sector.

“The stars are aligning for the rotation into rate-sensitive cyclicals: rate pressure is easing, growth is finally being supported by the Fed, and most importantly, earnings are widening as the other 493 companies emerge from an earnings recession,” Kwon said.

The Other 493 refers to the S&P 500excluding the “Magnificent Seven” tech mega-caps, which include Apple, Amazon, Alphabet, Microsoft, Nvidia, You’re hereAnd Meta-platforms.

But for this dream scenario to come true, the second-quarter earnings season must deliver.

While the bank expects a modest 2% rise in earnings per share this quarter, what will be more important will be the backdrop of slowing economic growth and accelerating earnings growth.

“The slowdown in GDP and the acceleration in EPS have provided the best backdrop for stocks,” Kwon said.

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