Bank of America's chief strategy analyst, Savita Subramanian, said that the bear market is officially over. Emotions, positions, fundamentals, and supply and demand support indicate that the lack of investment in stocks, especially cyclical companies, is still the main risk today, but overall, the most likely direction for US stocks is still positive.
After becoming one of the most famous bears on Wall Street, Savita Subramanian, chief strategy analyst at Bank of America, has recently turned bullish and sees some selected opportunities for the future of US stocks.
Subramanian now expects the S&P 500 to close at around 4,300 by the end of this year, not far from current prices. However, from a strategic point of view, she believes that investors who adopt an active investment approach can still make money in seemingly calm US stocks.
In a report on Friday, Subramanian said:
The bear market is officially over. Sentiment, position, fundamentals, and supply and demand support indicate that the underinvestment in stocks, especially cyclical companies, is still the main risk today, but overall, the more likely direction of US stocks is still positive.
Historically, after breaking through the bottom and rising by 20%, the S&P 500 has a 92% chance of continuing to rise in the next 12 months (compared to an average of 75%); based on data since the 1950s, the average return on the S&P 500 in this situation is 19% (compared to an overall average return of only 9%).
We believe we are back in a bull market, which may be part of what investors need to be enthusiastic about US stocks again.
Why did Subramanian turn bullish?
Subramanian believes that the reason why the US stock market will enter a bull market is that although interest rates are rising, the volatility around interest rates has decreased, the profit uncertainty that is technically declining but not as severe as expected has also decreased, and companies that are sensitive to profit margins are reducing costs. Moreover, after more than a year of interest rate hikes, the Federal Reserve seems to be ready to pause or even stop tightening policies.
Subramanian said:
After a rapid interest rate hike cycle, the Federal Reserve has room to relax its policies, and the stock risk premium may begin to decline.
Should investors choose active or passive management funds?
In terms of allocation, Subramanian believes that investors should focus on cyclical rather than defensive stocks, and should actively manage funds rather than passively manage funds.
Subramanian said:
After decades of passive equity funds taking market share from active equity funds, active management is now meaningful. Passive management funds mean lower efficiency and higher dispersion. We believe that the leading position of index funds this year is unsustainable due to the record-breaking narrowing of volatility.
How to choose an index?
For investors who tend to be indexed, she recommends focusing on equal-weighted indices such as the S&P 500 rather than more common market-cap-weighted indicators:
According to various signals, the return on the equal-weighted S&P 500 index may be twice that of the S&P 500 index. From the perspective of breadth regression and relative value, the equal-weighted index has more upward potential.
If everyone is bearish on the market, why can the S&P 500 P/E ratio still be 20 times?
Subramanian believes that in the market sentiment of "everyone is bearish", why can the US stock market still maintain a P/E ratio of 20 times. As shown in the figure below, over the past 50 years, when the earnings of listed companies reached the bottom, the P/E ratio of the S&P 500 index was exactly 20 times.
In addition, according to Subramanian's statistics, excluding the 50 largest stocks, the P/E ratio of the S&P 500 index is only 15 times, lower than the historical average of 18 times:
The risk premium of most cyclical stocks is higher than the average level reflecting recession risk, while the risk premium of defensive and long-term growth stocks is lower.
How to invest in AI companies?
For investors who want to enter the AI boom, Subramanian does not recommend chasing after those new AI companies, but focusing on "old economy" companies that need to use AI to improve efficiency and catch up with technology leaders:
The latest development of generative AI heralds earth-shaking changes. The obvious beneficiaries and companies that receive investment are software companies that can provide AI services. But not all technologies will succeed, and many need to continue to burn money to maintain competitiveness. Old economy and inefficient companies may increase profitability more sustainably from the improvement of efficiency and productivity in AI technology, thereby obtaining greater returns.
