ETFs
Stock Outlook: A Boring Stock for an Upcoming “Renaissance” Rally
- Bank of America predicts that large-cap value stocks will begin to outperform growth stocks.
- Value stocks have underperformed growth stocks for two decades, but that could soon reverse.
- Bank of America has rated four sector ETFs to buy to profit from the trade.
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The stock market’s most boring sector is about to experience a ‘renaissance’ of outperformance, according to Bank of America.
“Read my lips: large cap value,” Bank of America strategist Savita Subramanian wrote in a note.
Boring value stocks, which have all but been left for dead as investors chase AI-powered growth names, are expected to outperform the broader stock market for the first time in a long time, according to the bank.
“After two decades of consistent underperformance, U.S. value could once again outperform growth,” Bank of America said.
According to the bank, there are three scenarios in which value should be the preferred area of the stock market to hold.
Broader profit growth
“After a decade of underinvestment, poor quality earnings and the onset of inflation, efficiency-driven companies are expected to translate into broader S&P 500 earnings growth through 2025,” the company said. bank.
This means that it won’t just be ultra-large-cap technology companies that will be driving earnings growth and rising stock prices.
“Capital-starved value sectors, such as energy, with new capital discipline, and financial sectors, with stronger balance sheets and better lending capacity, should be rewarded as growth profits are catching up,” Bank of America said.
A hard landing
Another scenario in which value stocks are expected to outperform is if the economy has a hard landing.
This would likely lead to a sharp sell-off in growth-oriented stocks and relative outperformance of value stocks.
“Stock allocations are near record levels, and if recession risks begin to rise, investors switching from stocks to bonds will necessarily sell more growth than value,” Bank of America said.
A world with an interest rate of 5%
A A “higher for longer” interest rate regime should benefit value stocks and promote their outperformance, according to the bank.
“US value stocks lagged by an unprecedented 230% during the ‘2% world’ disruption caused by peak globalization, deflationary technology, optimal demographics and low debt burden. A world of structurally higher inflation and rates should support value stocks,” Bank of America said.
The bank said mean reversion in interest rates and other macroeconomic factors could support annualized outperformance of five percentage points for value stocks relative to growth stocks.
For investors looking to take advantage of the value exchange potential, the bank recommends investors take a look at four sector ETFs that are value-oriented.
Utilities
“Utilities (XLU, FXU) have one of the lowest ETF valuation scores, with P/Es at their lowest level since 2009 relative to the S&P 500. Utilities control the power to “AI to realize its potential,” Bank of America said.
Energy
“Energy (XLE, OIH, MLPX) is cheap at a sector and industry level. Energy companies should benefit from tight markets and the adoption of financial discipline. Energy industries like services should benefit from a growing demand while MLPs offer strong balance sheets and high yields and access to supply-constrained natural gas markets,” Bank of America said.
Banks
“The banks (KBE, KBWB) today look more attractive than the entire financial sector. Ebrahim Poonawala, head of North American bank research, expects the strong performance of large-cap banks continues and believes regional areas can benefit from greater certainty around Fed cuts,” the Bank said. of America said.
Basic consumption
“Commodities ETFs (IYK) look relatively cheap – which is understandable given recent concerns about consumer behavior. Sativa Subramanian is underweight in commodities, but in a landing scenario “Brutally, our equity analysts see opportunities for larger food retail promotions, which should help drive volumes,” Bank of America said.