Investors should buy risky stocks as the market shows signs of entering the early cycle of an expansion, said Bank of America. The bank double-upgraded consumer discretionary stocks and downgraded consumer staples stocks. Here’s why Bank of America thinks investors should be focusing on riskier cyclical stocks. Loading Something is loading.
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Investors should be playing more offense than defense right now as the stock market looks to enter the early cycle of an expansion, according to Bank of America.
In a Monday note, Bank of America’s equity and quant strategist Savita Subramanian issued a double upgrade to the consumer discretionary sector to overweight from underweight, while at the same time downgrading the safer consumer staples sector to underweight from marketweight.
The top stocks in the consumer discretionary sector include Amazon, Tesla, and Home Depot, while the top stocks in the consumer staples sector include Procter & Gamble, PepsiCo, and Costco.
Subramanian’s bullish upgrade of the riskier consumer cyclical sector was driven by a number of factors, including the expectation of no US recession, a solid foundation for consumer finances, and current investor positioning.
Here are seven reasons why Subramanian is getting more bullish on the consumer discretionary sector.
1. “Recession, schmecession: BofA expects a soft landing.””Our economists recently revised their outlook in favor of a soft landing, where growth falls below trend in 2024 but remains positive. Their revised forecast is based on further evidence of continued resilience in the US economy, including positive GDP revisions, strength in business spending, and a rebound in labor supply,” she said.
That bullish outlook should favor a more risk-on environment for the consumer discretionary sector.
2. Positioning in discretionary is at all-time lows.”Our economists forecast a soft landing, but investors appear positioned for a GFC-style recession. Active funds’ relative weight in Consumer Discretionary is at all-time lows in our data history for both long-only funds and hedge funds. Meanwhile, funds have added exposure to Staples since 2021, with hedge fund positioning near 6+ year highs.”
3. Flirting with early cycle.”Our US Regime Indicator is a four-phase framework based on the amalgamation of various uncorrelated macro inputs. When aggregated, the indicator defines four distinct phases… After six months in the Downturn phase, our indicator moved higher in July, signaling a potential new phase – Early Cycle. We wait for a second month of confirmation of a new regime before considering this an official shift to the Early Cycle phase… Consumer Discretionary has typically outperformed in Early Cycle, while Consumer Staples tends to lag.”
Bank of America 4. Discretionary earnings delivered a big beat in 2nd quarter.”Discretionary is tracking the biggest top/bottom line beat so far this earnings season (+3%, +20% respectively). Consensus estimates for Discretionary have finally started to catch up to Staples, pointing to a better consumer outlook.”
5. “Homebuilders are the canary in the coal mine.””Housing has shown signs of nearing a bottom, and homebuilders troughed late last year. This supports Consumer Discretionary as the sector most correlated with housing data. Discretionary leadership typically follows Homebuilders.”
6. Real wage growth back to positive.”Real wage growth is positive again for the first time in two years. Discretionary has historically been the biggest beneficiary (along with Tech) of real wage growth.”
7. Negative consumer headlines are overblown.”Burning through excess savings sounds bad. And the consumer has remained resilient despite inflation, as excess savings from pandemic-era stimulus allowed for an extended period of low saving rates but no strain on consumer balance sheets. But excess savings was a ‘nice to have’, and consumers are now back to run-rate savings.”
Bank of America