Pretty much every week, someone writes in to ask about the alleged disparity between the generally bearish musings of BofA’s Michael Hartnett and the more constructive assessment on offer from his colleague, Savita Subramanian.
When it comes to entertainment value, folks will take Hartnett every time. And I don’t blame them. His style is engaging, he’s funny, his charts are deliberately provocative (he’d probably prefer “thought-provoking”) and he has significant editorial latitude (which is often synonymous with job security).
But here’s the thing: He doesn’t have BofA’s house S&P call. That might seem like a meaningless distinction, but it’s not. Whenever you see headlines in the financial media about BofA’s “bearish” take on US equities and the reference is to Hartnett’s weeklies, those headlines simply aren’t accurate. Less charitably, those headlines are clickbait. The financial media knows he doesn’t have the house call. But they need web traffic. So, “BofA is bearish.”
BofA’s official house call for US equities is Subramanian’s. She hasn’t been overtly bearish in a while, something she endeavored to explain during a CNBC cameo on Wednesday. Here she is:
"I see far more bullish indicators for mid and large cap stocks than I do bearish," says @BankofAmerica's Savita Subramanian. "This AI theme is about a broader efficiency driven earnings power for the S&P 500 that we haven't seen in a very long time." pic.twitter.com/5w5gaF7XOM
— Squawk Box (@SquawkCNBC) September 20, 2023
With apologies to Subramanian (who really is good at her job), the clip above is painful. She can’t remember the evolution of her own S&P call, which speaks to the “moving target” characterization that JPMorgan’s Marko Kolanovic has, in the past, criticized (not in the context of any specific bank or strategist — that’s a no-no — just in general).
This probably says more about me than it does about Subramanian, but sitting here right now, I can recite the evolution of BofA’s S&P target going back at least three years off the top of my head. I can hear Savita now: “Yeah, you need to get out more, buddy.”
Anyway, given the press coverage, I felt compelled to mention Subramanian’s update, which I was otherwise inclined to ignore. Because 4,600 is just spot equities minus 3%. We’re just marking to market here and adding a little upside just in case.
“‘Recession averted’ says the consensus economist, but a fresh wave of bear narratives around equities have emerged,” she wrote. Those narratives aside, “the net message” from BofA’s five target indicators is bullish. Those indicators are shown below.
Note that “fair value” is the only indicator that suggests substantial downside, but since when do the fundamentals matter? (You can direct that question to Morgan Stanley’s Mike Wilson.)
To be sure, Subramanian echoed some of the key points raised by Hartnett. She just puts a more positive spin on them. The US is going from “financially-engineered growth to productivity-driven growth,” she said. The 2010s were about “easy money, levered buybacks [and] globalization,” while the 2020s are about “productivity gains, a capex boom and re-shoring.”
Here are a handful of key points from the update which, in full, is 21 pages:
- Productivity, efficiency, less labor intensity: A.I. is part of this, as are automation, right-sizing labor and wage inflation incentives after a decade of easy, financially-engineered earnings growth. Productivity would likely drive the equity risk premium lower.
- Duration risk? Stocks have options, bonds don’t. Fixed income duration is fixed. But companies can lower equity duration in the face of higher rates, as META did in Q1, slashing costs and returning cash via a massive buyback. The saving grace of Tech could be a shift from growth to cash cow.
- US manufacturing renaissance: Nearshoring, underspend, stimulus and infrastructure needed to support new tech tools is bullish. More for cyclicals/manufacturing, more prevalent in the equal-weighted benchmark.
- Read my lips: Equal-weighted over cap-weighted index. The equal-weighted S&P 500 has better visibility (lower EPS volatility, lower estimate dispersion) is cheaper and less crowded. The past nine “Recovery” cycles have seen the SPW almost always beat the SPX.
There was more. Much more. But that’s the gist of it.
The punchline was buried 13 pages in. “The average S&P 500 year-end target at the end of August typically implies gains of 5% through year-end, but is currently suggesting 2% downside,” Subramanian noted, adding that “in years when strategists expected the S&P to end the year lower, the S&P has ended the year higher 100% of the time.”
So… “sell the last hike”?