Written by Sinad Karahimetovic
Savita Subramanian, a strategist at Bank of America, tells clients in a note today that the Fed has more work to do.
History tells us that if the Fed starts easing prematurely, we could see a new wave of… In this case, “the short-term market volatility may be a lower price to pay.”
On the valuation front, Subramanian notes that “stocks are cheaper but not cheap.” The S&P 500 is trading at 18.4 times consecutive EPS after contracting around 30% YTD, which is more during previous recessions (average 20%). On the other hand, the forward EPS of 16.7 times (the consensus) is in line with the multiple seen in 2010.
“But if we take into account that multiples of 8% inflation are very high, it is hard to argue with a TINA (‘there is no alternative’ for stocks) amid a 4% cash return by early 2023 (home supply). These factors justify, in our view, It is twice less than what we enjoyed in 2010. And if a hawkish Fed means a higher probability of a recession, that translates into a higher equity risk premium (ERP),” Subramanian told clients in a note.
Bank of America remains bullish on energy and bearish on materials with the latter ranking last in the company’s tactical sector framework.
Elsewhere, the force is likely to continue to hurt technology and consumer appreciation.
Subramanian concluded that “relative sales of both segments have negative beta issuances in US dollars, but the valuations of the two segments do not reflect this risk, trading at significant gains against history.”