With market volatility surging and a "top-heavy index dragged down by mega-caps," Bank of America (NYSE:BAC) is advising investors to focus on active stock selection rather than simply buying the index.
In a note to clients this week, the firm offered key strategies for navigating current market conditions, answering the pressing question: "So, it's time to get active, but what do I buy?"
Bank of America suggests focusing on five key themes that align with near-term risks and opportunities:
Dividend-Yielding Stocks: As the Federal Reserve is expected to commence rate cuts in September, Bank of America notes that "a drop in money market yields could drive a shift in retiree assets into higher dividend-yielding stocks."
They highlight that 75 S&P 500 companies are expected to offer a higher dividend yield over the next three years than the current three-year U.S. Treasury yield.
Stocks That Out-Earn the Cost of Capital: With shifting economic conditions, Bank of America screens for companies that "can out-earn their cost of capital," emphasizing that these stocks are highly sought after, especially as the cost of equity becomes more sensitive to various inputs.
High-Quality Small Caps: Despite a recent 10% pullback in small caps, Bank of America still sees alpha opportunities in this sector. They recommend focusing on "high-quality inexpensive small caps with positive revisions and low refinancing risk."
Buying the Dip in Tech: Although the Nasdaq 100 is down 11% from its peak, Bank of America advises that some tech stocks "will still emerge as secular winners" and may now offer a more attractive entry point.
High-Quality Hedges Against Volatility: With higher volatility likely to persist, the firm recommends hedging with "high-quality stocks" that offer earnings and dividend stability, which are historically proven to be effective during turbulent times.