Investors should buy the dips in growth stocks because inflation is ‘well-contained,’ according to BofA

Stock trader
  • Investors should buy the dip in growth stocks and sell the rip in value stocks, according to a Wednesday note from Bank of America.
  • The bank believes inflation is “well-contained” and any spikes in rising prices will be temporary.
  • “In the reopening period to come, inflation spikes and market overshoots in value stocks could present good opportunities to take profits,” BofA said.
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Investors looking to take advantage of the recent stock market volatility should buy the dip in growth stocks and sell the rip in value stocks as inflation is “well-contained,” Bank of America said in a note on Wednesday.

Value stocks have been outperforming growth stocks since the summer, and the rotation into value from growth accelerated over the past month following a sudden spike in interest rates and fears of inflation.

But fears of a sustained spike in inflation due to a heated economy and easy year-over-year comparables will likely subside by the end of the year, according to the bank, which expects core CPI inflation to be just 1.7% by the end of the year.

If that scenario does play out, it will present a favorable back-drop for growth oriented stocks relative to value stocks.

“In the reopening period to come, inflation spikes and market overshoots in value stocks could present good opportunities to take profits,” BofA said, adding that investors should put new capital to work in small-cap growth stocks and large-cap tech.

BofA is confident that a rise in inflation will be a temporary rebound rather than a plateau for the five following reasons:

1. “Supply disruptions are temporary”

“Supply-chain bottlenecks, semiconductor shortages, and manufacturing delays today are likely to be relieved as the labor force returns to work. High prints in manufacturing price indexes largely reflect high commodity prices and therefore headline, not core inflation,” BofA said.

2. “Structural job losses.”

“Post-pandemic work-from-home could mean smaller rebounds in restaurants, in-person retail, and business travel. Progress on AI & automation could mean fewer industrial jobs to return to, especially at the low end,” BofA said.

3. “Union membership is near record lows.”

“Unions are politically almost homeless, with modern Democrats relying less on union votes and more on big tech donors; within the GOP, even “populist” senators haven’t endorsed the unionization vote at Amazon in Alabama,” BofA said.

4. “Capex is coming.”

“In the unlikely event wage growth does accelerate sharply at the low end, companies can accelerate R&D to prevent labor from gaining bargaining power. BofA expects corporate capex to rise 13% in 2021,” BofA said.

5. “The baby bust.”

“Already-plunging global birth rates accelerated lower: e.g. the Brookings Institution estimates 300,000 fewer babies born in the US this year because of the pandemic. Global central banks have called this one of the single greatest causes of lower GDP growth and falling interest rates,” BofA said.