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- Investors should stay bullish on US large cap stocks, according to Bank of America's Savita Subramanian.
- "The Fed just told us the economy is still too hot to stop hiking... good news for stocks," Subramanian said.
- Here are five reasons why stocks are poised to perform well going forward, according to Subramanian.
Despite rising interest rates, higher oil prices, and ongoing labor strikes, investors should stay bullish on the stock market.
Bank of America's equity strategist Savita Subramanian still sees plenty of reasons why US large cap stocks are well positioned to perform well going forward, according to a recent note.
These are the five reasons why investors should favor US large cap stocks, according to Subramanian.
1. The S&P 500 is getting in good shape.
"Stocks that grow up into large caps generally take share from peers that drift into small caps. But since 2021, 50% more large caps have become small caps than small caps becoming large caps (the reverse of prior decades), suggesting a purge of weaklings. Since rates began to rise, a record proportion of one in three Russell 2000 companies loses money vs. roughly one in 20 for the S&P 500."
2. High cash yields to power boomer spending.
"Since 1980, US debt to GDP rose 90%, lining Baby Boomers' pockets with $77 Trillion net worth / $60 trillion financial assets. Today's higher cash return of 5% translates to an annual $4 trillion, or 14% of US GDP. Moreover, years of refinancing opportunities at ultra-low rates drove the effective mortgage rate (3.6%) below pre-COVID levels (3.9%). Boomers' extra returns help spending and a massive wealth/real asset transfer to Gen X / Z."
3. 'It's the economy, stupid.'
"The Fed just told us the economy is still too hot to stop hiking, bad news for bonds but good news for cyclicals and stocks. US companies continue to rebuild closer to home despite higher capital costs; manufacturing is necessitated by a decade of underinvestment and is bolstered by stimulus. Cyclical stocks should lead."
4. Stocks are a good deal even with high interest rates.
"We hear, 'The equity risk premium (ERP) is zero. Buy bonds.' comparing the earnings yield based on the S&P 500 PE of 20x to nominal Tsy yields of 5%. But earnings are nominal; fixed income is fixed. Real rates vs. ERP is more apples to apples, and 2% real rates suggests ~300bps in ERP – low vs. the last decade but high vs. '85 to '05's labor efficiency boom, where real rates were 3.5% and S&P 500 returns were 15% per year."
5. Equal-weighted stocks still relatively cheap.
"The equal-weighted S&P 500 ERP is 50bp+ higher than the cap-weighted S&P 500, and trades at 17x on trough earnings. Our Regime Indicator flipped to a 'Recovery', typically associated with an earnings pickup; we forecast +8% EPS growth in '24. The equal-weighted S&P 500 also almost always beat the cap-weighted S&P 500 in past 'Recovery' cycles."