Bank Of America’s Subramanian Urges Optimism At Morningstar Conference

Savita Subramanian, Head Of U.S. Equity And U.S. Quantitative Strategy At Bank Of America, Delivers Keynote At Morningstar Investment Conference In Favor Of U.S. Large Cap Value Holdings
Savita Subramanian, Managing Director, Head of U.S. Equity and U.S. Quantitative Strategy at Bank of America Merrill Lynch
Savita Subramanian, Managing Director, Head of U.S. Equity and U.S. Quantitative Strategy at Bank of America Merrill Lynch
Chris Latham, Managing Editor, Wealth Solutions Report
Chris Latham, Managing Editor, Wealth Solutions Report

Savita Subramanian, Managing Director, Head of U.S. Equity and U.S. Quantitative Strategy at Bank of America Merrill Lynch, delivered a keynote speech Wednesday, June 26, at the first day of the Morningstar Investment Conference in Chicago. The 25-year Wall Street veteran encouraged the audience to buy U.S. large cap value holdings.

“That’s where I have the most conviction, and I see tremendous opportunities for investors over the next five to 10 years in this cohort of the Morningstar size and style boxes,” she said.

Subramanian said that the safest stance now is to be neutral – although she believes the absolute level of equities is likely to move higher by year-end. She provided the caveat that this forecast comes with less overall conviction, primarily because some other market commentators are starting to share the Bank of America view toward the upside.

Subramanian explains S&P forecasts
Subramanian explains S&P forecasts

At the beginning of the year, Bank of America’s forecast for the S&P 500 was 5,000. A couple months later, the company raised its forecast to 5,400. The S&P 500 opened on June 26 at 5,460.71.

According to Subramanian, the firm’s year-end forecast for the S&P 500 is actually the least important forecast, since it’s almost impossible for anyone to accurately predict precisely where the S&P 500 will fall at close of trading on Dec. 31. However, the year-end forecast does provide a sense of the market direction strategists think will occur.

Contrarian Approach

“What I’ve found is that when everybody’s worried, the market usually goes up,” she said, arguing that most market commentators are currently focused on what could go wrong, which usually is not the time to sell equities. “When everybody is telling you to back up the truck and load up on equities, that’s around the time when you want to think about selling stocks, and we’re not there yet.”

In her view, since the Federal Reserve model explains almost nothing about what markets are likely to experience in the future, a better approach is to take contrarian positions to the Wall Street strategist consensus.

Subramanian pointed to widespread bullish calls by Wall Street strategists during the 2000 tech bubble, as well as widespread sell calls in 2012 due to the U.S. debt downgrade and European recession despite the tail-end of that year being a great time to buy stocks.

“A couple of years ago, before 2022, we became very cautious because everybody around us was very positive. Nobody was talking about the Fed hiking interest rates from zero to 5%, nobody was expecting two wars to break out over the next 18 months,” Subramanian said.

But then when the rest of the market became bearish due to these factors and the regional bank crisis, Bank of America became more bullish. Yet the current stage of the market cycle presents a more frustrating picture, she acknowledges. She noted several trends in support of her thesis.

Cautious Market

Pension funds are the most underweight in public equities since at least 2006, and have supplanted much of that with more illiquid alternatives such as private equity, private credit and real estate investments that supposedly are uncorrelated with stocks and bonds – even though some alts have become much more correlated with traditional holdings than in the past.

The average active portfolio manager is more underweight cyclical companies than any time since the 2008 Global Financial Crisis. Professional money managers also have the lightest exposure to beta (the measure of market risk taking) since the financial crisis.

Subramanian stated that the average age of a money manager is around 40 to 45, which means they’ve lived through two black swan types of crises: the 2008 crisis and then the massive global economic pause triggered by COVID-19 in 2020. As a result, managers have been trained to doubt that markets can outperform during a prolonged period of higher interest rates and inflation.

“The world can survive. We’ve seen case studies of this for decades over time,” she said. “In fact the last 10 to 15 years were an anomalous period where interest rates were artificially low, monetary policy was overly stimulative, and we’re moving back to normal.”

Money managers went from over 10 years of expecting secular stagnation, to a brief blip of expecting above average growth, to stagflation in 2022. Yet stagnation and stagflation are very rare by historical measures, according to Subramanian. Much more common in the normal distribution are in-between markets of a little inflation with a little growth, and even a lot of inflation with a lot of growth.

“Think about where we are today. We are in goldilocks. But nobody believes it.”

Savita Subramanian, Managing Director, Head of U.S. Equity and U.S. Quantitative Strategy at Bank of America Merrill Lynch

“I think things are going to be okay,” she said, noting that strong environments for equities feature 1% to 2% real interest rates, 2% to 4% inflation, and positive real wage growth. “Think about where we are today. We are in goldilocks. We’re in goldilocks! But nobody believes it.”

Chris Latham, Managing Editor at Wealth Solutions Report, can be reached at clatham@wealthsolutionsreport.com

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