According to Bank of America, stocks still have further upside after a fresh bull market began on Thursday.
“After surpassing the +20 percent mark from below, the S&P 500 continued to rise 92 percent of the time over the next 12 months,” BofA said.
According to BofA, these are five questions investors should be asking now that the bear market is officially over.
The stock bear market is officially over and a new uptrend has begun after the S&P 500 closed 20% above its Oct. 12 closing low on Thursday.
And according to a Friday note from Bank of America equity strategist Savita Subramanian, stock market gains could continue as investors slowly embrace the bullish environment and macro headwinds such as rising interest rates near their end.
Additionally, based on historical data, stocks perform well after hitting the 20 percent bull market threshold.
“We don't give much value (pun intended) in arbitrary definitions, but note that after breaching the +20% mark from below, the S&P 500 continued to rise and then bounced back 92% of the time over the next 12 months. “19% on average,” Subramanian said.
This is based on data since the 1950s and compares to a 12-month win ratio of just 75% and an average 12-month total return of 9%.
While there are still risks to the rally, the stock market has an opportunity to continue climbing the worry wall as investors wait on negative sentiment and lingering concerns. But now is the time for investors to prepare for a new bull market and ask questions in preparation.
These are the five things investors should be asking themselves now that the bear market is officially over and a new bull regime has begun, according to BofA.
1. “What will it take to get investors optimistic again?”
“The wall of worry could last until investors feel pain in long-dated bonds or FOMO in stocks. Investors have settled on a single stock theme (AI, more below), but a broader bullish case for stocks can be made: we have exited ZIRP and real yields are back positive, volatility in terms of interest rates and inflation has eased, earnings uncertainty has receded and companies have maintained their margins by cutting costs and focusing on efficiencies. After a rapid cycle of rate hikes, the Fed has scope for easing. The equity risk premium could fall from here,” Subramanian said.
2. “Should I invest in actively managed funds?”
“After decades of passive equity funds acquiring shares of active ones, the active approach to public equity now makes sense. Less attention means inefficient markets (more alpha), higher dispersion and a reversal in passive flows favor stock selection over indexation. The supremacy of the index.” “The record tightness this year is unsustainable,” Subramanian said.
3. “Which stock index, equal-weight or cap-weighted?”
The equally weighted S&P 500 could double the return of the S&P 500 index on various signals. These include breadth reversal, relative value (equal-weighted index trades at 15x), lower duration risk versus cap-weighted index, and more upside versus cap-weighted index based on our analysts' price targets,” Subramanian said.
4. “If stocks are being slandered, why is the S&P 500 trading at 20x?”
“Wall Street is teeming with bears who lack conviction, and individual investor outflows are hovering at levels of capitulation at odds with high snapshot multiples. 20x isn't reason to be bearish – when earnings fall like today, P/E ratios go up. It's just math,” Subramanian said.
5. “How can I make money with AI?”
“The obvious beneficiaries, investees, are semi-corporations and selected software companies that can offer AI services. But not all tech companies are winning, many have to spend money just to stay competitive. The greater benefit could be inefficient old-economy companies that can grow.” “We can increase our profitability more consistently from efficiency and productivity gains,” Subramanian said.
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