A stock-market strategist at Bank of America has raised her year-end target for the S&P 500 index for the second time this year, calling for the large-cap benchmark to climb roughly 3.5%, to 4,600.
Savita Subramanian, head of equity and quantitative strategy, released her decision in a note to clients shared with MarketWatch on Wednesday.
The artificial-intelligence revolution will contribute to growing labor-market productivity, even among stodgy midsize companies, she said. In fact, these companies’ shares could see the biggest benefit since they aren’t as richly priced, Subramanian said.
Her call came with one important caveat: She urged BofA’s clients to express their bullish view on stocks by buying the equal-weighted S&P 500
not the traditional cap-weighted index. Historically, the equal-weighted index typically outperforms during economic-recovery cycles, which Subramanian says the U.S. is now in.
The equal-weighted index also benefits from more attractive valuations, optimistic expectations for corporate earnings growth, and the fact that the index isn’t as crowded thanks to its lower exposure to highflying megacap technology names like Nvidia Corp.
and Apple Inc.
This lower exposure to the so-called “Magnificent Seven” group of megacap technology names has helped drag on the equal-weighted S&P 500 this year, as this small group that includes a smattering of the most valuable publicly traded companies in the U.S. has driven much of the equity market’s year-to-date gains.
The S&P 500 has risen 16.2% since the start of 2023, compared with a 4.1% gain for the equal-weighted index. However, Subramanian said, the more favorable valuation could help drive considerable outperformance for the equal-weighted index, with implied annualized returns beating the traditional S&P 500 by 5 percentage points over the next decade.
She added a couple of other reasons for betting on S&P 500 equal-weight
to outperform: it is less crowded, while also being less sensitive to rising long-term bond yields, which have created problems for stocks recently.
“The S&P 500 is more top heavy than ever and 1 in 5 funds has over 40% of AUM in the Magnificent 7 (vs. 12% last year). Of the seven stocks, only AAPL and TSLA are underweight by active long-only funds. On the other hand, long only funds are 16% underweight the equal-weighted S&P 500, while crowding risk for Growth stocks started to rise recently,” she said.
Subramanian previously raised her year-tend target to 4,300 from 4,000 back in May, just as stocks were breaking higher. A streak of stock-market weakness in August prompted some on Wall Street to reconsider lofty year-end targets after macro strategists played catch-up to the market by hiking targets earlier in the summer.
The 2023 stock-market rebound rally took many on Wall Street by surprise, as the consensus heading into the year was that stocks would suffer during the first half before a rebound in the second as the Federal Reserve cut interest rates in response to a recession that economists had said was just around the corner.
So far, the recession hasn’t materialized, although the U.S. economy did record two consecutive quarters of GDP contraction in 2022.
Subramanian’s target is on the higher end of Wall Street’s range, although analysts including Fundstrat’s Tom Lee, Oppenheimer’s John Stoltzfus and Piper Sandler’s Craig Johnson all have higher targets of 4,825, 4,900 and 4,825, respectively.
The S&P 500 was trading modestly higher early Wednesday, up 0.2% on the day at 4,451 in recent trade, as investors waited to hear from Federal Reserve Chairman Jerome Powell. The index has been trading in an increasingly tight range since the beginning of August.