Bank of America (NYSE:BAC) analysts remain confident in the stock market's bullish trajectory, albeit with "high conviction" in specific areas.
Their latest note acknowledges a more bullish overall sentiment compared to 2023. While BofA maintains their year-end S&P 500 target of 5400, indicating modest returns, they see greater opportunity in large-cap value stocks, cyclicals, and dividend payers.
BofA dismisses recession fears, arguing that recent economic data simply reflects a return to normalcy after record highs. "Bears are looking through the wrong end of the telescope," the note states. They point to healthy underlying trends in delinquencies, PMI, labor markets, and retail sales.
Furthermore, the BofA note highlights a key disagreement with the broader market: their belief in large-cap value stocks. "The buyside disagrees with us," they acknowledge, noting an investor preference for expensive growth stocks.
However, BofA believes their US regime indicator, currently in "Recovery," favors value and cyclical stocks. They see similar trends in their Global and European models.
BofA argues that even some mega-cap technology companies can be considered value plays. "Some Mag. 7 are tomorrow’s large value companies given their optionality to shorten duration risk by returning cash," says BofA
Additionally, they identify traditionally underinvested sectors like Energy and Financials as poised for a comeback. BofA highlights these sectors' newfound discipline and potential for outsized returns.
They believe rising inflation has refocused companies on efficiency, and that advancements in artificial intelligence can significantly improve productivity in labor-intensive sectors. BofA concludes that American companies are now well-positioned to drive future growth through increased efficiency.