Bank of America forecasts continued market volatility and choppy stock performance in the coming years, attributing the turbulence to election-related policy uncertainties and broader economic signals.
The firm’s analysis suggests that the yield curve is indicating sustained volatility, with expectations for higher VIX levels extending through at least 2027. This outlook is reinforced by the bank’s proprietary “regime indicator,” which has recently entered downturn territory.
In response to these conditions, Bank of America recommends focusing on defensive stocks known for stability and income, which historically outperform during periods of market uncertainty.
“Quality, stability, and income have historically protected investors during volatile times. We are adjusting our sector recommendations to emphasize these characteristics,” the analysts wrote on Monday.
Avoiding Tech Sector Despite Recent Dip
Conversely, Bank of America advises against increasing exposure to the technology sector, despite recent price declines that might seem attractive. The firm remains underweight on Information Technology, citing concerns over its high valuation metrics and potential passive selling pressure as the S&P 500 considers new index-cap rules.
The bank notes that the technology sector’s enterprise-value-to-sales ratio has reached record highs, signaling overvaluation. Additionally, upcoming index-cap adjustments could prompt passive investment funds to rebalance their holdings, potentially impacting tech stocks.
Long-Term Strategy: Emphasizing Quality and Income
With increasing market volatility anticipated, the bank suggests that investors should prioritize quality and income in their portfolios. Savita Subramanian, BofA’s head of U.S. equity and quant strategy, advises adopting a cautious approach, focusing on stable, total return investments.
“Don’t try to time the market; instead, invest in safe, income-generating assets where you are compensated for waiting,” Subramanian told CNBC on Friday. She noted that while quality stocks are currently trading at a slight premium compared to lower-quality counterparts, they are not overly expensive.
Utilities and Real Estate Attractive for Yield Seekers
As interest rates potentially decline, Bank of America predicts that dividends from utilities and real estate sectors will become increasingly appealing. Real estate dividends, in particular, are expected to be more sustainable than in previous cycles, with the sector’s high-quality market cap doubling since 2008 to 70%.
“Real estate dividends offer attractive yield opportunities, particularly as the Fed’s interest rate cuts continue to drive investors in search of reliable income sources,” the analysts concluded.
