- Large-cap growth stocks continue to fall as 10-year Treasury yields rise.
- Bank of America’s Savita Subramanian told Insider she thinks growth is poised to fall further.
- Subramanian listed three sectors she’s bullish on now, one of which is her highest-conviction trade.
- Visit the Business section of Insider for more stories.
Tech stocks’ slide over the last month continued on Monday, with the Nasdaq Composite benchmark index confirming a correction by closing more than 10% below its February 12 high.
The 10-year yield’s moves have become the dominant story in the market, as their signals about inflation fears and an impending economic reopening weigh on investors’ minds and threaten to upend the market’s order perhaps more quickly than some expected.
According to Bank of America’s top US equity strategist Savita Subramanian, the large-cap growth stocks that rule the tech sector and the broader market won’t be hitting a floor just yet.
In an interview with Insider on March 4, Subramanian said there are three reasons she’s bearish on growth stocks in the near-term.
3 reasons tech stocks have further to fall
One is Bank of America’s view is that 10-year yields will continue to rise to 1.75% by year-end (they topped 1.6% intraday on Monday). That is the point, she said, where asset allocators will start moving out of stocks — particularly growth stocks — and into bonds.
Growth stocks are typically viewed as attractive long-duration alternatives to bonds when yields are low. They lose this quality when yields on Treasury bonds, which are a safer investment, offer more competitive returns.
Second, Subramanian said that the gap in valuations between growth and value stocks is historically high and is due for contraction with rates set to rise further.
“That dispersion between low PE and high PE stocks is still very, very wide — close to as wide as it was during the tech bubble — and we think that that needs to come down considerably,” she said.
She said valuations of growth stocks should drop 10% or more, while valuations of value stocks should rise 10% or more.
Finally, Subramanian said she believes growth stocks continue to be too crowded of a trade. She said that there is an “extreme level of overweight positioning” from long-only fund managers.
“The big, near-term risk is the positioning and the fact that FAANMG stocks carry in aggregate a 50% overweight in the average mutual fund, which is pretty shocking given how big those companies are in the benchmark,” Subramanian said.
She added that positioning, combined with the disparity in valuation between growth and value, provided a unique opportunity for investors.
“The valuations and positioning around low-risk value are so compelling, you don’t normally see this type of a set up,” she said. “So I would continue to extend that relative positioning in overweight value and underweight growth.”
3 value sectors to buy
Within value stocks, Subramanian said that she likes three sectors. One of them is low-price-point retailers, which should see a tailwind from stimulus checks in the months ahead.
Another is energy, which she thinks will get a boost from the economic reopening.
“I think there’s a bit more to go in energy outperformance, especially on the reopening where we’re all driving again, where companies are humming and economic activity back to more normal levels,” Subramanian said.
The energy sector should also benefit from rising inflation, she added, and could get a boost in ESG fund positioning as it does more to neutralize carbon emissions.
The Vanguard Consumer Staples ETF (VDC) and The Energy Select Sector SPDR Fund (XLE) offer exposure to low price-point retailers and energy firms, respectively.
Subramanian’s highest-conviction trade right now, however, is financials. The cyclical sector typically benefits from rising interest rates and early-cycle economic activity.
She listed the factors that are coming together to make the sector so attractive right now.
“Financials looks amazing in our work,” Subramanian said. “I mean it’s kind of hitting on all cylinders, it’s got price momentum, it’s got positive earnings, it’s got a cash returns story materializing, it’s got quality of balance sheet, valuation is still relatively low versus other areas of the market.”
She said the biggest risk it faces is stagnation in interest rates, but added that the past has shown it’s possible for the sector to do well even if this ends up being the case.
Investors seeking exposure to the financial sector might consider a product like the Vanguard Financials ETF (VFH).
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