(Reuters) – BofA Global Research said on Wednesday it expects the S&P 500 to end 2023 up nearly 7% from earlier forecasts, and that the “old economy” stocks on the blue-chip index could benefit as much, if not more, from their new-age tech peers.
The Wall Street brokerage now expects the index to end the year at 4,600 points, up from its previous estimate of 4,300 and up 3.5% from Tuesday’s close of 4,443.95.
The S&P 500 is up 15.7% so far this year, driven largely by a rally by a handful of megacap growth stocks like Nvidia and Meta that have ridden the artificial intelligence (AI) boom.
BofA remains in a “neutral” to “positive” range on U.S. stocks, with a bias toward equal-weight stocks, said strategists led by Savita Subramanian.
An equal weight index assigns the same weights to each component, unlike a market capitalization index, such as the S&P 500, where large companies have an outsized influence. Equal-weighted stocks have less volatile earnings, less variance in analyst estimates, and are cheaper and more crowded than growth stocks, Subramanian said.
As a new bearish narrative around equities emerges, BofA says the “old economy,” which includes value stocks — as abundant in the equal-weight S&P 500 — can benefit as much as technology and growth.
This is not rated as “rich,” Suramanyan says.
Additionally, not only have equal-weighted stocks “almost always” beaten megacap stocks over the past nine recovery cycles, Subramanian noted that they can help reduce duration risks compared to safer assets like bonds.
While the S&P 500 is roughly in line with its historical average, the valuation gap between seven stocks and equal weight (SPW) stocks in 2016 It’s the highest since the 2001 tech bubble, notes Suranian.
This suggests “more reversals in the SPW.”
However, if even mega-caps remain attractively priced, Suramanian said, like when Meta announced a cost reduction and buyback earlier this year.
“Tech companies’ focus on shareholder returns, efficiency, and the right amount of cost structure can be their path to better results.”
Several brokerages, including Morgan Stanley, recently made the case for cyclical sectors, particularly energy, as a good way to trade stocks through the end of the year.
(Reporting by Suzanne Mathew in Bengaluru; Editing by Savio D’Souza)
