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Bank of America strategist Savita Subramanian warned clients that U.S. equities are cheaper, but still not cheap.
Her comments are in line with Bank of America’s recent projections, calling for a 20% downside in the S&P 500 EPS.
“Not just high inflation but inflation volatility argues for lower multiples: historically, the avg. trailing P/E amid inflation volatility regimes (rolling 3-yr CPI volatility over 1 std. dev. above the avg.) has been just 11.9x vs. a 16.5x average (1960 to now),” Subramanian told clients in a note.
The strategist also reflected on the recession risk as she argues that Tech and Consumer Cyclicals are still not discounting a potential recession. On the other hand, Energy, Materials, and Financials are more than or almost fully pricing in a full recession.
“The biggest laggards YTD, Tech and Consumer Discretionary, have not priced in recession risk either by this measure – all of the multiple contraction within these sectors has been from higher risk-free rates. Defensive sectors may not see demonstrable increases in risk premia (especially in a mild recession) but cyclicals that have seen no increase in ERP (Tech, Consumer Discretionary, and some Real Estate) may have further to fall,” the strategist added.
BofA’s tactical framework sees upside opportunities in “defensive exposure to the long-end of an oil curve,” while Materials and Financials also screen well.
On the other hand, Tech and Consumer Discretionary are screening poorly on the back of the above-mentioned ERP risks.
