Bank of America: US stock market direction is about to change, value stocks and small-cap stocks are expected to outperform the broader market.

Zhitong
2023.09.12 01:03
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Strategists say that as the stock market enters the "recovery" phase of the business cycle, stocks that have underperformed this year, including value stocks and small-cap stocks, are expected to outperform the broader market.

According to Dolphin Research, Savita Subramanian, the chief strategist at Bank of America, believes that the direction of the US stock market is about to change based on historical experience. The strategist stated that under the "recovery" phase of the business cycle, stocks that have underperformed this year, including value stocks and small-cap stocks, are expected to outperform the broader market, replacing the growth stocks and large-cap stocks that dominated the strong rebound in the stock market in 2023.

In a research report, Savita Subramanian stated, "Indeed, from a 'cyclical' perspective, the past few years have not been clearly defined, with asynchronous ups and downs during and after the pandemic." However, when it comes to Bank of America's Regime quantitative model, she stated, "Our Regime indicators still have relevance in capturing factor trends." She added that January to June marked a period of weakness, with investors flocking to safe growth stocks and high-quality stocks.

Bank of America's Regime quantitative model tracks inputs such as inflation, GDP forecasts, 10-year Treasury yields, and various manufacturing data. The bank stated that historically, this phase of the cycle favors financial, industrial, and commodity stocks, while utilities, healthcare, and consumer staples tend to underperform.

The upward momentum of the US stock market this year stalled in August, as the strong economy dampened investors' optimism about the nearing end of the Federal Reserve's rate hike activities, leading to a decline in the stock market in September as well. However, the S&P 500 index has still risen more than 16% year-to-date.

Bank of America's view contrasts sharply with Morgan Stanley's. Michael Wilson, Morgan Stanley's chief US equity strategist, issued another warning on Monday, stating that investors should focus on a "late-cycle investment portfolio" consisting of defensive stocks, industrials, and energy stocks.

In a report, Michael Wilson stated that the market is in a late-cycle backdrop, which is when the Federal Reserve is expected to pause or reverse its hawkish policy stance, and stocks that prioritize conservatism, such as those with higher levels of cash and lower levels of debt, have started to outperform the broader market. He reiterated his view that the stock market has not yet reflected the risk of an economic downturn.

He added, "As is typical during this period, price-to-earnings expansion has exceeded fair value determined by macro fundamentals, which poses a burden on the resumption of growth and/or incremental policy support." However, for now, Michael Wilson's negative outlook on the stock market this year has not materialized. Wall Street has been discussing the sustainability of this year's rebound in the US stock market. Both John Stoltzfus, Chief Investment Strategist at Oppenheimer, and Binky Chadha, strategist at Deutsche Bank, believe that the recent pullback in the US stock market was expected and that a moderate correction is a normal part of the market cycle. However, Michael Wilson believes that the recent performance of the US stock market indicates that the market is catching up with the weak macroeconomic fundamentals.

The next major risk that investors face is the release of the US August CPI data on Wednesday. This closely watched data will provide clues as to how much further the Federal Reserve needs to raise interest rates in order to achieve its inflation target.