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Opportunities are in cyclicals, BofA’s quant model shows

Published 13/06/2024, 10:20 pm
© Pavlo Gonchar / SOPA Images/Sipa via Reuters Connect
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Robust job numbers and continued disinflation in recent weeks are favorable for equities. However, consumers feel worse than the aggregated economic data suggests, Bank of America (NYSE:BAC) strategists said, citing the “vibe-cession” commentary and Federal Reserve studies on consumer preferences regarding disinflation versus employment.

Sentiment has shifted from stagnation in the 2010s to stagflation in the 2020s, bypassing the usual scenario of moderate growth and inflation.

The abrupt end to an era of record-low borrowing rates and globalization-driven disinflation may require an adjustment period. Moreover, extreme global shocks, such as the Global Financial Crisis, COVID-19, and various trade and traditional wars, may lead investors to assign higher probabilities to tail risks, BofA noted.

“This has yielded ultra-defensive investor positioning, record concentration in secular growth stocks, and other technical oddities,” strategists led by Savita Subramanian said.

“But accelerating profits, valuation and positioning argue that 2H’s pain trade may be led by cyclicals,” they added.

BofA said its tactical industry model strongly favors GDP-sensitive industries.

Out of ten so-called "Opportunities" industries—those with above-average rankings in EPS revisions, price momentum, and valuation—eight are cyclical, including Industrials, Autos, Energy, Metals, and Banks, the bank highlighted.

This aligns with their "Recovery" phase regime, which predicts cyclicals, value, and risk factors to outperform defensives, secular growth, and low beta. Historically, these "Opportunities" have outperformed the equal-weighted S&P 500 by four percentage points per year since 1997.

“This group now trades near the cheapest level since 1997 outside of a few months in 2008, at just 12x fwd. PE, a 28% discount to the average S&P 500 industry,” strategists noted.

“Long-only funds are also underweight these industries with the exception of Interactive Media, which includes META (NASDAQ:META) & GOOGL.”

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