Investors often want to know why they should dare keep buy stocks if the stock market is at all-time highs. The reality is that stocks do rise over time, or at least that has been the case since anyone started tracking the markets. BofA Securities has issued its new RIC Report in November with a key message for investors who are sitting on the sidelines since the market is already at all-time highs.
The main take — A productivity boom is not priced in!
BofA’s November 2024 RIC Report details that such stark electoral sweeps like were just seen by Donald Trump and the Republican party are quite rare as was just seen in the 2024 elections. BofA’s view is that 2025 may see some of the largest policy shifts in a generation. This is bringing an order shift favoring equities over credit and bonds.
PRODUCTIVUTY DRIVING A NEW BULL MARKET
BofA’s RIC Report sees a huge potential private sector productivity boost. This could be driven by energy maximalism, deregulation and industrial onshoring. The view also points to raising living standards and potentially sparking a renewed bull market. While this may be a calling for a new bull market, stocks are up over 24% so far in 2024 and the SPY gain was 24% in 2023 after a dismal -19% in 2022 as the Fed’s rate hikes kicked into high gear.
Several uncommon reasons were issued to own common stocks heading into 2025 and to raise equity allocations:
- Longevity — investors will need 6% more in stocks than target date models imply
- Scarcity — the supply of US equity shares is falling vs. surging demand
- Momentum — buying stocks at the highs outperforms “any time” returns by 5percentage points
- Profits — broader EPS growth of 13% expected in 2025
- Backup plan — $8 trillion corporate cash can easily become dividends/buybacks as needed
THE BIG VIEW ON MEGACAPS
BofA is signaling right from the start that U.S. mega-caps currently offer poor value. Without double counting Google, there are 8 U.S. stocks now worth at least $1 trillion — NVIDIA, Apple, Microsoft, Alphabet, Amazon, Meta, Tesla and Berkshire Hathaway. Another 8 stocks are worth $500 billion up to the Trillion-dollar mark: Broadcom, JPMorgan, Walmart, Eli Lilly, Visa, UnitedHealth, Exxon Mobil and Oracle. Needless to say, that is a massive concentration of the S&P 500 and the entire stock market tied up in a small number of stocks.
This leads BofA to recommend three other themes for U.S. equity investors to consider.
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BofA MAKES THREE ETF/THEMATIC PICKS
The first pick was an equal-weight version of the S&P 500 index members. This was named as the Invesco S&P 500 Equal Weight ETF (NYSEArca: RSP), with relative valuations near historic lows against the broader market-cap-weighted index. Forward returns could be 8.3% per year per the RIC report. The RSP is up 15% YTD versus almost 24% YTD for the SPY ETF. Only about 2 percentage points of that 15% YTD gain has been since the election.
Banks are another beneficiary, with the SPDR S&P Bank ETF (NYSEArca: KBE) ETF mentioned as a key winner ahead. BofA notes that banks have been trading at nearly 80-year versus the S&P 500 and that the market is not pricing in benefits from potential M&A and deregulation. The KBE is up 30% YTD versus 24% YTD for the SPY ETF. Keep in mind that 18 of those 30 percentage point gains are since election day.
A third ETF theme is the U.S. manufacturing onshoring and renewal trade. The First Trust RBA American Industrial Renaissance ETF (NYSEArca: AIRR) was named here noting that profitable small-cap and midcap industrials have far outpaced midcaps generally and large cap industrials since 2020. The AIRR ETF is up 43% YTD versus 24% for the SPY ETF. Keep in mind that 6.3 of those percentage points are since election day.
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MANY RISKS AS WELL
Oggonomics would not feel good about telling its readers that there is never a free-lunch when it comes to investing. That is particularly true with investing in stocks. The S&P 500 gains of nearly 24% so far in 2024, and the near 5% gain in the days after the election, already make many investors feel the market is priced for perfection.
Megacap valuations are becoming harder and harder to justify and each one-percent gain in any of the top five stocks with $1 trillion market caps is more theoretical dollars ($10-20 billion plus) than 30% of the 500 companies total market caps.
U.S. interest rates remain an ongoing risk, but the much larger risk is that the total debt load of the U.S. is already almost at $36 trillion and the government’s budget for 2025 is already setting the pace for another huge deficit that could take total U.S. debt to nearly $40 trillion by the end of 2025 or shortly thereafter. Higher interest rates are likely to only exacerbate the risks of a debt spiral.
The opinions regarding productivity gains leading to a new bull market and the thematic ETF picks are from the BofA RIC REPORT from November 2024 and are after the presidential election results.
