In a recent update, BofA Global Research has revised its year-end target for the S&P 500, projecting a nearly 7% increase compared to its previous forecast. The financial institution also highlighted the potential for “old economy” stocks within the blue-chip index to outperform their newer technology-focused counterparts.
Bank of America now anticipates the S&P 500 to conclude 2023 at 4,600 points, which marks an increase from its earlier estimate of 4,300 points and a 3.5% rise from the index’s closing value of 4,443.95 on the preceding Tuesday.
Throughout the current year, the S&P 500 has exhibited a 15.7% gain, primarily driven by the robust performance of a select few mega-cap growth stocks, including Nvidia (NASDAQ: NVDA) and Meta (NASDAQ: META), which have capitalized on the artificial intelligence (AI) wave.
While the momentum of this rally has shown signs of moderation, Bank of America maintains a “neutral” to “positive” outlook on U.S. equities. Its strategists, led by Savita Subramanian, express a preference for equal-weighted stocks, a choice which differs from market capitalization-based indices like the S&P 500, where larger companies carry more significant influence. Subramanian underlines that equal-weighted stocks tend to exhibit less volatile earnings, narrower disparities in analyst estimates, and represent a more cost-effective and less crowded alternative to growth stocks.
Despite the emergence of bearish narratives surrounding equities, Bank of America contends that “old economy” stocks, notably value stocks found within the equal-weighted S&P 500, could deliver comparable gains to their tech and growth counterparts. According to Subramanian, these stocks have not been priced as aggressively.
Additionally, Bank of America points out that equal-weighted stocks have historically outperformed mega-cap stocks during previous recovery cycles. They may also serve as a hedge against duration risks when compared to safer assets such as bonds.
While the valuation of the S&P 500 aligns with its historical average on an equal-weighted basis, the valuation gap between the index’s top seven stocks and equal-weighted (SPW) stocks currently stands at its widest point since the 2001 Tech bubble, according to Subramanian. This suggests potential upside in SPW stocks.
Nonetheless, mega-cap stocks also remain in contention if they can maintain attractive valuations, as exemplified by Meta’s cost-cutting measures and buyback announcement earlier this year, according to Subramanian. The strategist suggests that tech companies focusing on shareholder returns, efficiency, and optimizing cost structures may chart a path to outperformance in the current environment.
Several brokerages, including Morgan Stanley, have recently advocated for cyclical sectors, particularly energy, as a viable approach for trading stocks leading up to the year-end.
