Analyst: Stick With Stocks Over Bonds Despite Economic Risks

Economic slowdown concerns and the ramping U.S. trade war with China once again has the Dow down more than 300 points on Tuesday. Despite the market jitters, Bank of America analyst Savita Subramanian said investors should stick to stocks over bonds despite forecasting essentially flat stock returns through the end of 2019.

Bullish Catalysts Ahead

Subramanian said there are several bullish market catalysts that should help support stock prices in the next several months, including negative market sentiment and accommodative monetary policy. Bank of America reports that sell-side strategists’ average equity allocation recently dipped to just 54.2%, its lowest level in more than two years. Subramanian said that percentage is typically a bullish contrarian indicator.

In addition, while bond yields continue to fall, S&P 500 dividends are stable, with more than 60% of index components now out-yielding 10-year U.S. Treasuries.

“Relative to 2Q07’s peak, the S&P 500 has more high quality stocks, half the leverage (1.9x net debt/EBITDA vs. 3.7x in ‘07) and more earnings stability (13% std. dev. of GAAP earnings growth vs. 25% in ‘07),” Subramanian wrote in the note.

8% Annual Total Returns

Even after the recent market turbulence, the S&P 500 remains up 15.9% overall year to date, and Subramanian said investors can expect the index to hold onto those gains. Bank of America reiterated its year-end S&P 500 target of 2,900, slightly above Tuesday’s trading level. In the longer term, Subramanian is anticipating 6% annual returns from the S&P 500 and a continued dividend yield of around 2%.

In the near term, however, he said investors should be aware of headline risk generated from geopolitical uncertainty, particularly when it comes to unexpected tweets by U.S. President Donald Trump. According to Bank of America, on days since 2016 during which Trump tweets the most, stocks have averaged a statistically significant negative average return.

Benzinga’s Take

Investors who are willing to ride out the geopolitical storm and take advantage of Bank of America’s projected 8% average annual total return for the S&P 500 can buy low-cost index funds like the SPDR S&P 500 ETF Trust SPY.

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