Bank of America projects a strong 2025 for equities, forecasting the S&P 500 to reach 6,666 by year-end—a 10% rise from its current level of 6,049. The bank attributes this optimism to a robust earnings-per-share growth estimate of 13% next year.
However, 2025 may not be the year for a blanket "buy-the-index" approach. Savita Subramanian, head of U.S. equity and quantitative strategy, emphasized during the bank’s 2025 outlook call that sector rotation could be key to capturing value in the upcoming year.
Subramanian highlighted that individual stocks could offer more attractive opportunities than the overall index. She pointed out that the S&P 500, driven by euphoric sentiment in mega-cap tech stocks, appears overvalued. The valuation gap between the equal-weighted and cap-weighted S&P 500 is near record extremes, and she expects this discrepancy to shrink over time.
A recent Bank of America report from November 26 reinforces this outlook. It predicts decelerating earnings for the so-called Magnificent 7 mega-cap tech stocks, contrasting with accelerated earnings growth among the average company. This divergence could set the stage for a significant shift in market leadership.
Subramanian explained that, despite the elevated market valuation, the average stock remains relatively inexpensive. “The market’s valuation is being skewed upward by a handful of mega-cap tech names that are still priced for extremely high expectations,” she noted. “We favor the average stock and are less optimistic about the broader index.”
The rotation into cyclicals could gain traction, even though investors remain cautious and positioned defensively amid fears of stagflation. Subramanian argued that the current environment, characterized by maximum defensive positioning and overweight exposure to alternatives and illiquid assets, creates an ideal setup for cyclicals to outperform defensive sectors.
She outlined several reasons for this bullish stance on cyclicals:
Policy Tailwinds: A pro-business Trump administration, if reinstated, would prioritize deregulation and policies favoring value and cyclical sectors like financials, energy, and consumer stocks.
Rate Cuts Amid Earnings Growth: The Federal Reserve’s continued rate cuts in a period of accelerating corporate profits create favorable conditions for cyclicals.
Reduced Leverage: As companies emerge from a tight credit environment, they are better positioned with lower leverage and more asset-intensive operations.
These dynamics could drive earnings growth in key sectors. Subramanian also warned of risks stemming from inflationary policies and higher long-term interest rates, particularly under the Trump administration. To mitigate these risks, she recommended focusing on large-cap value stocks, which provide inflation-protected yields through dividends. Bank of America remains overweight on financials, materials, real estate, and utilities—sectors that align with large-cap value and stand to benefit from capital expenditures and inflationary trends. Financials, in particular, could see gains from deregulation. Conversely, the bank is underweight in secular growth and defensive sectors, such as consumer staples, healthcare, and information technology.
This strategic allocation reflects confidence in cyclicals’ ability to lead the market in 2025 while addressing potential headwinds with a balanced approach to value-driven opportunities.
