There are 10 reasons why investors should still own stocks, Bank of America said.
Strategists pointed to bearish sentiment and positioning that could signal upside ahead for equities.
The bank was neutral on stocks overall in 2023, predicting the S&P 500 would rise slightly to 4000.
Markets are dealing with concerns of an imminent recession in 2023 – but there are 10 reasons why investors should be owning stocks right now, according to Bank of America strategists.
“In what feels like like a conviction-less market, we have high conviction in upside risk cyclical sectors within the S&P 500 this quarter,” a team of strategists lead by Bank of America’s Savita Subramanian said in a note on Monday.
That comes amid the growing fears of a coming downturn, with inflation still well-above the Fed’s 2% target and interest rates at their highest level since 2007.
Yet, the S&P 500 has maintained a strong start to 2023, with stocks up 8% from levels in January. According to the bank, there are 10 reasons that upside could continue over the coming quarter.
Market sentiment is extremely bearish. In a contrarian indicator, Wall Street strategists are the most bearish they’ve been on stocks since 2009. Institutional investors are holding onto more bonds than stocks since the Great Financial Crisis, according to Bank of America’s Sell Side Indicator, meaning any shift in sentiment could drive fresh gains.
Recession is “very expected.” Similarly, most investors are expecting a recession. The risk of a downturn is priced in at 65%, according to the US Recession Probability Forecast – a level “only seen during actual recession,” strategists noted.
The Fed can ease up on interest rates. However, if a recession is coming, the Fed has plenty of room to loosen financial conditions after raising rates aggressively in the last year.
There’s trillions of dollars of “dry powder” on the sideline. Though the Fed, governments, and banks tightening liquidity conditions, there’s a record 2.2 trillion sitting in venture capital and private equity firms, which can potentially serve to buffer the market.
Cyclical stock sectors are purged. “Long only funds and HF have shed exposure to GDP-sensitive sectors and are now near peak exposure to Health Care, Utilities, and Consumer Staples vs. cyclicals,” strategists said.
The Japan Factory Automation Index hit a trough. That typically leads to upside for a year and a half for Japanese FA stocks, strategists said, which has a high correlation to US capital goods and materials stocks.
Equity risk premium should fall. Though some strategists have warned of a potential earnings recession, if corporate earnings bottom in the fourth quarter of this year, the earnings risk premium should start to fall, as investors expect more positive growth ahead.
The economy will see productivity gains. Wage inflation continues to rise, which has historically increased labor productivity.
Earnings should be healthy. “Earnings quality is healthier than amid the typical profits recession. The proportion of high quality stocks in the S&P 500 is 60%+ and has improved over the past 20 years,” strategists said.
The market is headed into historically strong-return quarters. The second and fourth quarter have historically been periods of strong returns for stocks, which should buoy the S&P 500.
Strategists noted though that they were neutral on stocks overall in 2023, expecting the S&P 500 to finish the year around the 4000 level. That implies a 3% drop from current levels, and a 5% increase in the index since the start of the year. That’s in line with forecasts from other banks, who say stocks will trade relatively flat in 2023.
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Source: https://finance.yahoo.com/news/10-reasons-why-investors-own-234506366.html