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According to Bank of America, market volatility will remain high in the coming years.
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The firm recommends avoiding the urge to buy technology stocks while they are currently down.
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BofA instead recommended looking for high-quality names, as well as dividend-paying utility and real estate stocks.
The market is becoming increasingly volatile and stocks will remain volatile for years, according to Bank of America.
According to the firm, in the short term, political uncertainty related to the election will keep the market moving. In the longer term, through the end of 2027, the yield curve signals increased volatility ahead, as shown in the chart below:
Additionally, a proprietary Bank of America “speed indicator” has entered slowdown territory.
Given these elements, the firm recommends defensive stocks that generally outperform in times of uncertainty or weakness.
“Quality, stability and revenue have protected investors during previous volatile markets. We are reassessing our sector forecasts to strengthen these characteristics,” the analysts wrote Monday.
On the other hand, investors should avoid increasing their exposure to the popular tech sector, the bank warned.
Even as price fluctuations help depreciate the names of mega-cap industries, several qualities still make this cohort an unfavorable investment, the bank said.
“Don’t buy the technology sector on the dip,” analysts said. “We remain underweight information technology, despite arguments that the sector has been badly beaten.”
The bank cited record highs in the sector’s enterprise value-to-sales ratio, a sign that these companies remain overvalued. At the same time, tech funds could soon face passive selling pressure S&P 500 prepares new rules for capitalization indices.
Specifically, the index plans to reduce the weightings of equity fund with $350 billion in assetsTimes of Update reported. In that case, passive investment vehicles would have to restructure their holdings during the next quarterly rebalancing.
As volatility increases over the long term, quality and income should play a larger role in portfolios, the analysts wrote.
While growth stocks made sense when borrowing costs were low in the 2010s, that’s changing: In the coming years, the bank expects returns in the single digits.
Quality exposure also makes sense in the shorter term, according to Savita Subramanian, head of U.S. equities and quantitative strategy at BofA.
“Don’t be a hero,” she said. CNBC Friday“You just have to park in safe, full-return type vehicles where you get paid to wait.”
In a note published last week, Subramanian noted that today’s quality stocks are cheap and those rated B+ or better are trading at a slight premium to their lower-quality peers.
At the same time, utilities and real estate dividends are likely to attract investor attention as the Federal Reserve’s interest rate cuts push them to seek yield opportunities.
“Real estate dividends are likely more sustainable than in previous cycles, given that since 2008 the sector has doubled its proportion of high-quality (B+ or better) market-leading securities…
