Jeff Christensen/Reuters
- Stocks are undergoing a leadership change, and "old economy" names will be the new winners, BofA says.
- Sectors like energy and commodities have seen underinvestment in recent year, and supply chain issues will push prices upward.
- These sectors are also trading at near-record discounts relative to the broader S&P 500, strategists said.
The market is undergoing a shakeup, and stocks rooted in the "old economy" are going to be the winners of the new cycle, according to Bank of America.
"Bear markets have historically resulted in leadership change, which suggests old economy sectors are likely the winners of this cycle," the bank's strategists said in a note on Wednesday.
That comes after a dismal year for the market, with the S&P 500 tanking 20% in 2022 amid the Federal Reserve's aggressive rate hikes.
But not all sectors will feel the pain of higher interest rates this year, the BofA strategists said, noting that most of the damage has been inflicted on tech and growth stocks. Those areas of the market benefited from huge amounts of capital in previous years, and are now struggling as financial conditions tighten. Meanwhile, the opposite is playing out for old economy stocks.
"The old economy (Energy Materials, Housing, etc.) has been starved of capital for 10+ years," strategists added. "We see the pendulum swinging back to the old economy as prolonged underinvestment has led to supply issues."
That's supported by the fact that the strong economic indicators, like a robust labor market, have seemingly postponed a recession, strategists said, which is also bullish for old economy sectors.
"The consensus narrative shift from 'hard landing' to 'soft/no landing' (for now) should translate to recession risk being priced out of sectors that were pricing in the biggest risk (i.e. old economy)," the note said.
Additionally, old economy sectors are trading at near-record discounts compared to the rest of the S&P 500. Strategists estimated that the investments in the old economy now saw a 6% higher equity risk premium than the S&P 500.
That echoes the view of other Wall Street commentators, who say the stocks that unloved stocks from the last cycle are entering a new long-term bull market. Goldman Sachs' commodities chief Jeff Currie chalked up the freefall in tech and other growth stocks as "the revenge of the old economy", and predicted that supply issues in areas like energy and commodities would lead to a bullish supercycle that could last around 12 years.