Bank of America Securities Head of US Equity & Quantitative Strategy Savita Subramanian speaks on the "Maginificent Seven" tech rally and biggest market risks for 2024 with Bloomberg's Jonathan Ferro and Lisa Abramowicz
We beginning that top story stock's moving lower after a tech fueled rally. Soa Vita Subramanium, head of US equity strategy at b of A Global Research, saying this, the idiosyncratic versus macro risk is high, and the Magnificent seven is not a monolith. In fact, this reductive moniker obscures the companies are behaving very differently from one another. Euphoria is evident for the Magnificent seven, but nothing else. Savita On places Saint Jode just around the table, smita good morning, good morning, we go to that monolith and thanks for being with us. How different is the performance now in those seven stocks.
So it's interesting because I feel like, even though we all think of the market as being just this one direction, seven companies leading the charge, the stocks themselves are acting very differently.
And if you just.
Measure idiosyncratic risk as like kind of non market specific risk, we've actually seen a surprising increase in stock specific risk. So what this means in English is that you can actually make more money picking stocks than just buying the index outright, And that's been our call for a while. I mean, I think what it's been a little bit unerving about this year in the last few months is that we haven't necessarily seen a broadening pattern emerge in the market. We're still seeing leadership pretty decisively in this cohort. But look at what happened after earnings for some of these companies.
I mean, these.
Stocks are priced for perfection. Everybody owns them. They're pretty expensive, maybe not you know, as expensive as prior tech bubble levels, but they're relatively healthy in terms of valuations. And I think that what happens from here is a broadening to other areas of the market that aren't necessarily as risky.
As we think.
We say the price to perfection, then they running another twenty percent.
At a single Dita especial.
In my head, you just wonder what the takeaway from Friday's price section is.
So you know, what I think was interesting is that one of the drivers for that big bump was initiating a dividend, A big growth company initiating a dividend.
And I think that's a.
Really important signal because you know, our call is that we're at a point where the next leg higher inequities is likely to be retirees maybe moving out of cash back into riskier sources of yield. Of course, this was predicated on the idea that the FED was going to start cutting interest rates, which obviously is a bigger question today When that happens, you know kind of how much, how soon?
But I do think that the idea of this wall of cash.
Sitting there in money market and short duration bonds that's earning five percent, if that starts to come down, or if you start to see equity yields come up like we are in certain parts of the market, I think that could be the value proposition for equities. Again, it's kind of like Tina two point zero.
Tina two point zero happens when rates start getting cut, Yeah, and the economy keeps chugging along.
Exactly how much.
Does it shift your thesis if the rate cuts don't happen as soon, as as deeply as the market's currently expecting.
Yeah.
So, I mean, I think this is a slow evolution. But I mean, I guess I don't think you have to wait for the Fed to actually cut interest rates to think about equity.
Yield, because think about what's happening right now.
The reason that the Fed might not HI might not cut is because of an inflation. Surprise, how do you want to protect against inflation? And I've said this before a couple of years ago. I think equity income is the best way to protect a retirees assets from inflation as well as offering income, so that I think it becomes the name.
Of the game again.
And if you think about, you know, a couple of years ago, when we had rampanto inflation, the FED was hiking rates, equity income.
Actually did really well.
The high dividend yielding stocks were one of the best places to be in twenty twenty three's bear market.
So why is it not working yet? Or twenty twenty two spare marketing? I'm sorry, no, I'm just wondering why is it work?
Because I'm thinking, you know, I'm looking at the Magnificent seven or Magnificent eight, whatever you want to call it, right, it is diversification now away from the magnificent seven to the magnificent two in Meta, in Nvidia.
Basically this year.
I mean, how much do you start to question the thesis if it's not being born out now?
Well, I mean I think that the reaction to typically if you think about a big growth company initiating a dividend a tech company initiating a dividend, that would be anathema.
But I think investors want that.
They want to see companies have capital discipline, They want to see companies returning cash.
They want to see these big growth.
Vmuths actually give us back a little bit of money.
Financials you wear over white financials, you still have a white.
The bank still overweight the banks. Yes, what I like.
About that sect.
I think that there's still this underappreciated aspect with large cap banks that has yet to be recognized by the market.
And that's the idea that when.
You look at the underlying earnings trends of large regulated companies, they're actually relatively healthy. These are well capitalized companies. Dividend preservation is not necessarily at risk like it is for some of the regionals. I think we're at a point where the regulatory environment is likely to flatline from here and not get any worse for at least the big guys, and I think that that's a positive. I mean, if you think about inflation protected yield again, I think of financials as a good source of it.
The emphasis was on the big guys. Yeah, I think we'll notice that small what's gone on with the smaller guys.
So I think it's.
Too soon, especially if we're not in and all clear. You know, Fed's going to cut rates a bunch of times this year. I think that you want to stick with larger, well capitalized financial companies, and that's been our call.
I personally worry a little bit.
About small caps, and you know, we're bullets on small caps with a very big caveat that. There are still a lot of smaller companies that are.
Like banks, like real estate. There's a lot more risk around, you know.
Just the fact that the FED moved from zero to five a lot of that attrition, and that that sort of pain is happening in the smaller benchmark rather than the larger benchmark.
Energy we heard from Lori Cavacino as a hedge against inflation. Is it still a hedge against inflation or does it just hold a whole host of other risks.
I think energy is an interesting sector, and from the risk perspective, my sense is that a lot of those risks are priced.
In at this point.
If you think about it, these companies are no longer just extracting oil from the ground. You know, at the least provocation of a price hike in oil prices.
They've got discipline around production.
Which means that supply is going to be constrained, which means earnings are going.
To be less volatile.
I think this is a sector that plays a role in getting to net zero if we ever do. And it also is a source of really healthy yield. And the companies have told us they are laser focused on preserving cash return rather than you know, production targets. I think that's the big sea change in the energy sector is that these companies now have discipline. It's very different from you know, prior to twenty seventeen, what.
Do you pay attention to that's actually market moving versus just what we always get, which is the reason why everyone who sends.
It out right the narrative.
So, I mean, I think what's interesting is if you look at the data, there is one unequivocal statement I can make with total confidence. Nobody is betting on a cyclical recovery. When it comes to professional investors, and when you look at the average hedge fund, mutual fund, even the average individual investor, what do we owned. We don't own energy or financials or high beta the beta exposure of the average mutual fund today is almost the lowest level we've seen since the financial crisis. I mean, I think that's what's interesting is that despite the fact that the economy seems to be running maybe too hot, there is no bid on that on that theory.
I remember all of our conversations, and I remember the one coming out of twenty two and twenty three, and you said the biggest risk was upside.
Risk to pocrties.
Yeah, let's put price targets to one side. Let's talk about risk right now. What is the biggest risk then twenty four?
So I think the biggest risk to the S and P five hundred in the near term is upside. I think that even you know, our target.
Five thousand is probably too low in the near term.
But I do think that the reason we're not as optimistic on stalks today is that we have seen this percolated, percolating positive sentiment, especially around the magnificent seven, which is the area of you know, abject you know, euphoria. So I think that that area of the market is at risk. But I do see this lack of real conviction in stocks outperforming bonds.
I still think that stocks then cash than bonds. That's the lineup you want to have.
That's the hierarchy. Interesting. Saveta go to see you as a way to see it. Great to say you hear it in the studio Savita Si Romanium there Bank for America