As we approach the end of 2023, investors are grappling with mixed signals in the stock market. Fears of a potential Fed rate hike and concerns about a consumer slowdown have cast a shadow on the equity markets. However, Bank of America's head of US equity & quantitative strategy, Savita Subramanian, has offers a reassuring message for equity investors, as quoted on Yahoo Finance.
In a recent note to clients, Bank of America raised its year-end target for the S&P 500 from 4,300 to 4,600, indicating a potential 3% upside from the current S&P 500 levels. Subramanian's message is clear: despite concerns, BofA sees a positive outlook for equities.
Case for the Equal-Weighted S&P 500
One of the standout recommendations in Subramanian's note is the bank's "highest conviction call" that the equal-weighted S&P 500 may outperform the standard S&P 500 index. This approach doesn't adjust the index for the size of companies, treating all stocks equally, rather than giving more weight to the largest corporations.
Historically, during recovery cycles, the equal-weighted S&P 500 has outperformed the traditional index. This phenomenon suggests that smaller and mid-cap companies could see stronger growth during recovery phases compared to their mega-cap counterparts. Additionally, concerns about deglobalization, such as China's potential reduction in Apple consumption, might have a more substantial impact on large tech stocks than on relatively smaller-sized large-cap stocks.
Top-Heavy Nature of the S&P 500
One significant factor contributing to Bank of America's preference for the equal-weighted S&P 500 is the increasing top-heaviness of the standard index. Subramanian highlights that just five companies now account for 25% of the S&P 500 index.
This concentration of market cap in a handful of mega-cap tech giants is a notable deviation from historical norms. The top-heaviness of the S&P 500 index implies that the performance of these few mega-cap stocks can disproportionately influence the overall index. This situation might limit opportunities for diversification.
Opportunity in "Old Economy" Stocks
Savita Subramanian's analysis suggests that the equal-weighted S&P 500 offers an opportunity in "old economy" and less tech-centric companies. These companies, which are more prevalent in the equal-weighted index, could benefit from the recovery phase just as much as technology and growth companies.
Investors should also note that interest rates in the United States are likely to be higher for longer. A high interest rate environment is not great for growth stocks. In this environment, many may consider RSP to be a better bet.
RSP Versus SPY
Invesco S&P 500 Equal Weight ETF (RSP) follows the S&P 500 Equal Weight Index and equally weights the stocks in the S&P 500 Index. The fund holds 504 stocks in total. No stock accounts for more than 0.26% of the fund. The fund charges 20 bps in fees and yields 1.79% annually.
SPDR S&P 500 ETF (SPY) tracks the S&P 500 Index, which is composed of five hundred selected stocks, all of which are listed on national stock exchanges and span over 25 separate industry groups. Apple (7.08%), Microsoft (6.46%) and Amazon (3.27%) hold the top three spots. The fund charges 9 bps in fees and yields 1.51% annually.
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)
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