Bank of America is getting bullish on stocks and recommends these strategies
After being one of the most prominent bears on Wall Street, Bank of America has changed its tune on stocks and sees pockets of choice opportunity ahead. The firm’s equities team hasn’t changed its year-end S&P 500 target — it still sees the large-cap index closing at around 4,300, which means little movement from Thursday’s close of 4,293.93. But investors who take an active, tactical approach to investing can make money as the market climbs out of a funk that began in early 2022. “The bear market is officially over,”[ads1]; Savita Subramanian, BofA’s equity and quant strategist, said in a client mark friday. “Sentiment, positioning, fundamentals and supply/demand support that being underinvested in equities and cyclicals remains the key risk today – the more likely direction of surprise remains positive.” In Wall Street’s view, the conventional definition of a bull market requires a new all-time high. However, Subramanian rejects such “arbitrary” standards, noting that when the S&P 500 is up 20% from a low, its 12-month return is 92% of the time with an average upside of 19%, well above the respective norms of 75% and 9%. The bull case rests on the notion that interest rates are rising, but the volatility around them has decreased. Uncertainty about earnings, which are in a technical recession but not as bad as expected, has also fallen, as margin-conscious companies roll back costs. Finally, after more than a year of rate hikes, the Federal Reserve appears poised to pause and perhaps halt policy tightening. “After a brisk hiking cycle, the Fed has latitude to ease,” Subramanian wrote. “The equity risk premium could fall from here.” In terms of allocation, Subramanian sees a number of paths: a focus on cyclical rather than defensive names, active rather than passive management, and for those with a bias toward indexing, looking at the S&P 500 equilibrium index rather than the more common capsule-weighted gauge. The firm also recommends heavily divided companies as “we are returning to a total return world.” While BofA sees returns for the cap-weighted as flat, it expects much stronger gains for the equal-weighted because it is not as exposed to the vagaries of the top seven companies that have been most responsible for the market’s gains. The equal-weighted index is up just 2.6% so far this year, compared with the cap-weighted return of 11.8%. “We think we’re back in bull territory, which may be part of what it takes to get investors excited about stocks again,” Subramanian said. For investors looking to get in on the AI trend, BofA recommends not chasing new listings, but rather looking at “old economy” companies that need to use AI to increase efficiency and catch up to technology leaders.
