After being one of the most prominent bears on Wall Street, Bank of America has changed its tune on stocks and sees pockets of select opportunities ahead. The firm’s equity team has not changed its year-end S & P 500 target — it still sees the large-cap index finishing around 4,300, which implies little movement from the Thursday 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,” Savita Subramanian, BofA’s equity and quant strategist, said in a client note Friday. “Sentiment, positioning, fundamentals and supply/demand support that being underinvested in stocks and cyclicals is still the key risk today – the more likely direction of surprise is still positive.” In Wall Street’s view, the conventional definition for a bull market require a new all-time high. However, Subramanian rejects such “arbitrary” standards and noted that when the S & P 500 gains 20% from a bottom, it posts 12-month gains 92% of the time with average upside of 19%, well above respective norms of 75% and 9%. The bull case rests on the notion that interest rates are rising but volatility around them has declined. Uncertainty around earnings, which are in a technical recession but not as bad as expected, also has fallen, while margin-conscious companies are rolling back costs. Finally, the Federal Reserve, after more than a year of hiking interest rates, appears ready to pause and perhaps halt policy tightening. “After a fast hiking cycle, the Fed has latitude to ease,” Subramanian wrote. “The equity risk premium could fall from here.” As far as allocation goes, Subramanian sees a number of avenues: focusing on cyclical rather than defensive names, active over passive management, and, for those with a bias toward indexing, looking to the S & P 500 equal-weight index rather than the more common cap-weighted gauge. The firm also recommends strong-divided companies as “we are returning to a total return world.” While BofA sees returns for the cap-weighted as flat, it anticipates much stronger gains for the equal-weighted because it isn’t subjected as much to the vagaries of the top seven companies that have been most responsible for the market’s gain. The equal-weighted index is up just 2.6% year to date, compared to the cap-weighted return of 11.8%. “We believe we are back in bull territory, which might be part of what it takes to get investors enthusiastic about equities again,” Subramanian said. For investors who want to get in on the artificial intelligence trend , BofA does not recommend chasing new entries but rather looking at “old economy” companies that need to use AI to increase efficiency and catch up to tech leaders.
