Two weeks ago, BofA’s Savita Subramanian lifted the bank’s year-end target for the S&P to 4,600.

The comedians among you would probably call that bad timing. US equities fell 1% that day, 1.6% the next day, 0.2% the day after that and then, for bad measure, 1.5% two sessions later.

The market gods can be cruel that way. And unlike other deities, they aren’t easily swayed. You can’t appease them with sacrifices or mollify them with superstition. Nobody ever pacified an angry SPX by sacrificing a goat. (I’ve tried, it just turns into a bleating mess and the results are hit or miss). And you can’t will the Nasdaq to a win by wearing a lucky pair of tube socks. (That I haven’t tried. Me in tube socks is unthinkable. “A don never wears shorts.”)

Subramanian’s not dissuaded, though, particularly not on her call for equal-weighted outperformance. “The equal-weighted S&P ERP is 50bps+ higher than the cap-weighted and trades at 17x on trough earnings,” she wrote, in her latest, adding that the bank’s Regime Indicator “flipped to a ‘Recovery,’ typically associated with an earnings pickup.” During recoveries, the equal-weighted index “almost always” beats the cap-weighted, she remarked.

Needless to say, not everyone’s convinced we’re in a “recovery” regime, and some are adamant that to the extent you’re inclined to favor cyclicals, they should be late-cycle cyclicals. Morgan Stanley’s Mike Wilson reiterated that point in a note dated October 1.

Rather than endeavor to compare, contrast and juxtapose via superfluous editorializing, I instead present a few short excerpts from Wilson’s almost verbatim reiteration of last week’s talking points alongside short excerpts from Subramanian’s latest, and leave it to readers to draw their own conclusions. To wit:

[V]aluations look even more extended today, with the equity risk premium falling below 100bps to new cycle lows, as both nominal and real interest rates have risen amid supply/demand imbalances and the Fed’s affirmation that it’s serious about keeping rates “higher for longer.” Consumer Discretionary stocks look particularly challenged. We believe this price action reflects slower consumer spending trends, student loan payments resuming, rising delinquencies in certain household cohorts, higher gas prices and weakening data in the housing sector. Our economists, who wisely avoided making the recession call earlier this year, see a weakening consumer spending backdrop. — Mike Wilson, Morgan Stanley

We hear, “The equity risk premium is zero. Buy bonds.” comparing the earnings yield based on the S&P 500 PE of 20x to nominal Treasury yields of 5%. But earnings are nominal; fixed income is fixed. Real rates vs. ERP is more apples to apples, and 2% real rates suggests ~300bps in ERP – low vs. the last decade but high vs. ‘85 to ‘05’s labor efficiency boom, where real rates were 3.5% and S&P 500 returns were 15% per year. It’s the economy, stupid. The Fed just told us the economy is still too hot to stop hiking, bad news for bonds but good news for cyclicals and stocks. US companies continue to rebuild closer to home despite higher capital costs; manufacturing is necessitated by a decade of underinvestment and is bolstered by stimulus. Cyclical stocks should lead. Since 1980, US debt to GDP rose 90%, lining Baby Boomers’ pockets with $77 trillion net worth/$60 trillion financial assets. Today’s higher cash return of 5% translates to an annual $4 trillion, or 14% of US GDP. Moreover, years of refinancing opportunities at ultra-low rates drove the effective mortgage rate (3.6%) below pre-COVID levels (3.9%). Boomers’ extra returns help spending and a massive wealth/real asset transfer to Gen X / Z. — Savita Subramanian, BofA