📖 Your Q2 Earnings Guide: Discover the Stocks ProPicks AI Highlights to Jump Post-EarningsRead more

Opportunities are in cyclicals, BofA’s quant model shows

Published 13/06/2024, 10:20 pm
© Pavlo Gonchar / SOPA Images/Sipa via Reuters Connect

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.”

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.