The S&P 500 index has been statistically expensive for some time, with 19 out of 20 valuation metrics suggesting it is priced above historical averages. However, Bank of America strategists say the historical premium may be warranted due to compositional changes in the benchmark.
The shift towards healthier balance sheets and corporates focusing on efficiency rather than low-quality growth has improved earnings visibility. Despite perception that policy headlines like tariffs are negative for growth, deregulation could be a positive factor through cost-cutting and efficiency gains.
Industries heavily regulated by policies are trading at significant discounts compared to less regulated sectors like Technology and Consumer & Professional Services. The strategists note a strong inverse relationship between regulations and forward price-to-earnings (P/E) ratios, indicating that “more expensive = less regulated.”
The report highlights a shift in sector valuations, with Financials seeing an upward movement while Technology is experiencing a downturn. Since 2008, Technology stocks have benefited from growth, access to capital, and minimal regulatory increases. However, Financials have faced stringent regulations and spent the past decade improving their balance sheets.
A reversal of fortunes could occur, as the strategists suggest that deregulation could ignite equal and opposite reactions – a relative re-rating in Financials versus a relative de-rating in Tech. The bank’s tactical sector framework now ranks Financials as the second most favorable sector, while Technology has fallen to fourth place.
Source: https://www.investing.com/news/stock-market-news/19-of-20-metrics-suggest-the-sp-500-is-expensive-bofa-3880006