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The strategists highlighted productivity, efficiency, and less labor intensity as some of the factors that will fuel solid economic growth. They said productivity gains driven by automation and AI can have a notable impact on equity markets as well.
One of the effects is the potential to lower the equity risk premium (ERP).
“Labor efficiency from the mid80s to 2008 saw 15%/yr total returns, real rates averaged 3.4% (vs. today’s 2%) and ERP fell. Old economy, inefficient co’s (more prevalent in the equal weighted S&P 500) could benefit as much as Tech and growth, but have not priced this theme in as richly,” the strategists said in a report.
They also noted that companies, like in the case of Meta Platforms (NASDAQ:META), have the ability to reduce their equity duration when faced with rising interest rates. Meta cut costs aggressively and returned cash to shareholders through substantial share buybacks.
The sentiment is also such that stocks could benefit.
“Sentiment is more bearish than bullish, our Sell-Side Indicator implies +15% over the next 12 months. S&P 500 consensus growth expectations are almost an all-time low, and ex-the Magnificent 7’s 15% expectations, LTG is 5.7%, an all-time low. One in 5 funds have >40% AUM in TMT but are 16% u/w the avg stock,” the strategists added.
Finally, they urged investors to consider the equal-weighted S&P 500 over the cap-weighted index due to better visibility.
“Seasonality in 4Q is also favorable for the SPW vs. the SPX,” BofA strategists concluded.
