Bank of America is getting more bullish on S&P 500 stocks. Just not the ones that have been driving the S&P 500 higher all year.
The money-center bank Monday called for the S&P 500 to hit 4300 by the end of the year. That's pretty bold. For one thing, that new target is nearly 8% higher than the one it replaces. But it's also saying that megacap growth stocks aren't where the action will be for the rest of the year.
"Seven stocks drove the entire gain on the S&P 500 (year to date). The top five stocks are off their peak weight, but represent 22% of the S&P 500, well above the Tech Bubble peak 18%," said BofA Strategist Savita Subramanian in the report.
Bank Of America's Newfound Bullishness
If BofA is right with its new forecast, that means the S&P 500 has 2.5% of upside — or perhaps more from current levels.
How? BofA's new estimate includes a top limit of 4600 for the S&P 500 this year. That's more than 9% higher than Monday's S&P 500 close of 4193.63. And keep in mind the S&P 500 is already up nearly 10% this year.
"Glass half-full view: the bull case for stocks," the report said. "The era of easy money is behind us, but that might be a good thing. Over the past few decades we have enjoyed financially engineered growth: cheap financing, buybacks and cost cutting. Today, Corporate America has shifted focus to structural benefits."
Time For Big-Cap S&P 500 Stocks To Take A Back Seat
BofA's Subramanian says investors looking to capture the S&P 500's upside should look beyond market-value weighted ETFs like the SPDR S&P 500 Trust. She's seeing more upside in the equal-weighted S&P 500.
ETFs like Invesco S&P 500 Equal Weight ETF weight all 500 stocks in the S&P 500 the same. That's different from the S&P 500, which gives greater weight to the most valuable firms in the index. Equal weighting the index is a better idea now, she says, as the giants in the S&P 500 dominate the index and many are set to struggle.
Apple's $2.8 trillion market value, for instance, now surpasses that of the entire Russell 2000 index of smaller companies, BofA found. Meanwhile, megacaps' valuations pulled so far ahead that they're at risk of a 10% pullback, while the equal-weight S&P 500 stands to rise that much.
Additionally, there's more upside to analysts' 12-month price targets outside the megacap techs. For instance, look at computer chip designer Nvidia. Shares are already up 113% this year to 311.76 apiece. That already overshot analysts' 12-month price target on the stock by 6%, says S&P Global Market Intelligence. Apple, too, is up 34% this year, leaving just 2.8% to analysts' 12-month targets.
But smaller S&P 500 stocks have more upside, Subramanian said without naming specific companies. Dish Network stands to gain more than 175% before hitting its 12-month price target. And vaccine maker Moderna is still 67% below analysts' 12-month price target.
"The current gap of 5.4 (percentage points) in upside potential suggests the (equal-weight) index outperforming the (market-value weight) index by 6 (percentage points) over the next 12 months," Subramanian said.
S&P 500 Stocks With Most Upside
None of the largest S&P 500 companies qualify based on BofA analysts' 12-month price targets
| Company | Ticker | Upside | Sector |
|---|---|---|---|
| DISH Network | 176.3% | Communication Services | |
| Warner Bros. Discovery | 73.4% | Communication Services | |
| Moderna | 66.7% | Health Care | |
| Newell Brands | 58.6% | Consumer Discretionary | |
| Halliburton | 58.1% | Energy | |
| Caesars Entertainment | 57.5% | Consumer Discretionary | |
| Match Group | 55.8% | Communication Services | |
| PayPal Holdings | 55.8% | Financials | |
| Enphase Energy | 55.7% | Information Technology | |
| KeyCorp | 53.2% | Financials |
Sources: S&P Global Market Intelligence, IBD
Follow Matt Krantz on Twitter @mattkrantz
