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- A buy signal is about to flash for stocks, Bank of America said Wednesday.
- The S&P 500 is hovering close to the firm's year-end target of 4,000.
- Investors should take a look at "old economy" sectors like materials and energy.
Investors are sitting at the edge of a signal to buy stocks, and the best way to maneuver through the potential rush will likely be in the so-called "old economy," said Bank of America.
BofA's Sell Side Indicator – a measure of investor enthusiasm about stocks – was 52.9% in February, steady for the month as the S&P 500 lopped off 2.6% of its value. The bank said its "reliable" contrarian indicator is 1.5 percentage points away from triggering a "Buy" signal.
Meanwhile, the S&P 500 was around 3,951 on Wednesday, just below BofA's 2023 target of 4,000.
"With the S&P 500 trading near our year-end target, we do not think now is the time to buy the market index wholesale," Savita Subramanian, head of US equity and quantitative strategy for Bank of America, said in a note published Wednesday. "But we do see stock selection opportunities, particularly in old economy sectors that have been starved of capital for 10+ years."
BofA upgraded the materials sector last week to overweight from underweight, citing capital and supply discipline. The sector, which has a nearly 3% weighting on the S&P 500, is also most exposed to China's reopening after its extensive COVID lockdowns.
The bank is also overweight the energy, consumer staples and financial sectors.
For its bull case in consumer staples: "No matter what, we still have to eat. Defensive. Benefits from consumers trading down," Subramanian said in an earlier note from February 21.
Brent oil pushing beyond $100 a barrel in 2023 was part its bull case for energy, while "mispriced risk" feeds the bullish view for financials.
The SSI's stance was girded by bond allocations remaining at a 10-year high as yields surged, while cash allocations hovered near record lows.
"Strategists are weighing optimism around China re-opening and strong consumer data against the risk of further rate hikes following a hot jobs report and higher-than-expected inflation," Subramanian said Wednesday.
The S&P 500, which tracks 11 sectors, meanwhile, was shoved lower last month while bond yields soared, with investors preparing for the Federal Reserve to jack up interest rates even further as inflation proves sticky.