Bank of America strategists have highlighted 10 reasons why investors should hold onto stocks, even as concerns of an impending recession loom large in the markets. In a note on Monday, the strategists led by Savita Subramanian stated that there are reasons to be bullish on equities, despite bearish sentiment and positioning. They predict that the S&P 500 will see a slight rise to 4000, while maintaining a neutral stance on stocks in 2023.
Here are the 10 reasons that Bank of America cites for continued upside potential in the coming quarter:
Reason 1: Bearish Market Sentiment.
Wall Street strategists are currently the most bearish they have been on stocks since 2009. Institutional investors have also been holding onto more bonds than stocks since the Great Financial Crisis. As a contrarian indicator, this suggests that any shift in sentiment could drive fresh gains.
Reason 2: Priced-In Recession.
Many investors are anticipating a recession, with the risk of a downturn priced in at 65% according to the US Recession Probability Forecast. However, if a recession is coming, the Fed has room to ease up on interest rates, having raised them aggressively in the past year.
Reason 3: Dry Powder.
Despite the tightening liquidity conditions by the Fed, governments, and banks, there is still a record $2.2 trillion sitting in venture capital and private equity firms that could potentially serve as a buffer for the market.
Reason 4: Purged Cyclical Sectors.
Long-only funds and hedge funds have shed their exposure to GDP-sensitive sectors and are now near peak exposure to Health Care, Utilities, and Consumer Staples, which means there is room for gains in cyclical sectors.
Reason 5: Japan Factory Automation Index.
The Japan Factory Automation Index has hit a trough, which typically leads to a year-and-a-half of upside for Japanese FA stocks. This has a high correlation to US capital goods and materials stocks.
Reason 6: Falling Equity Risk Premium.
Although there are concerns about a potential earnings recession, if corporate earnings bottom out in Q4 2023, the earnings risk premium should start to fall, as investors expect more positive growth ahead.
Reason 7: Productivity Gains.
Wage inflation is on the rise, which has historically increased labor productivity, leading to better overall economic performance.
Reason 8: Healthy Earnings.
Earnings quality is healthier than in 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.
Reason 9: Historically Strong Quarters.
The second and fourth quarters have historically been periods of strong returns for stocks, which should buoy the S&P 500.
Reason 10: Room to Loosen Financial Conditions.
The Fed has raised rates aggressively in the past year, but they still have the ability to ease up on financial conditions if necessary.
While Bank of America is neutral on stocks in 2023, other banks also predict that stocks will trade relatively flat. Nonetheless, investors can take comfort in the 10 reasons outlined by Bank of America that suggest there is still potential for upside in the markets.
.jpg)
Social Plugin