The historically expensive S&P 500 could be seeing loss of reopening optimism, Bank of America says

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  • The shrinking premium of stay-at-home stocks over business-as-usual firms could mean the end of the S&P 500’s reopening enthusiasm, Bank of America said Monday.
  • Quarantine plays including Zoom and FedEx commanded a 40% premium in March over firms slammed by the coronavirus. The market has since split the difference between the premium’s pre-outbreak discount and March’s peak.
  • “We think the market could be pausing, just like Texas and a few other states, in reopening optimism,” the team led by Savita Subramanian wrote in a note to clients.
  • Such a halt endangers the S&P 500’s historically expensive valuation. The index is statistically expensive by all 18 metrics used by the analysts apart from equity risk premium and free cash flow.
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Stay-at-home stocks’ premium over business-as-usual names suggests the market’s hope for a swift economic reopening could soon pause, Bank of America said.

S&P 500 companies benefiting from quarantine orders and telecommuting vastly outperformed the market through March as stocks tumbled to their coronavirus trough. Names including Zoom,FedEx, and AT&T at one point commanded a 40% premium to companies particularly damaged by quarantines such as Gap and Carnival Corp.

That premium has since shrunk to largely split the difference between the pre-COVID discount and the March peak. The market’s unbridled enthusiasm for a rapid recovery may finally be giving way to spiking coronavirus case counts, the bank said.

“We think the market could be pausing, just like Texas and a few other states, in reopening optimism,” the team led by Savita Subramanian wrote in a Monday note.

Bank of AmericaBank of America


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Such a trend would likely pull the benchmark index from its lofty levels. The S&P 500 is statistically expensive by nearly all 18 metrics, Bank of America said, with just its equity risk premium and free cash flow readings showing the market as inexpensive.

The index is also still attractive to index investors for its healthy dividend yield, the team said. S&P 500 dividends sit at roughly three times the yield on a 10-year Treasury note, nearing a 70-year record.

For those looking to pick winners within the expensive index, Bank of America found healthcare stocks to provide the best quantitative positioning. Tech giants slid to second place in the firm’s short-term list, as strong earnings forecasts and price momentum give way to high valuations.

The analysts also found opportunities for positive earnings revisions and momentum in semiconductor stocks, food products, and media services. Energy stocks ranked last in the bank’s framework, and the bank warned against “value traps” that boast above-average prices alongside low-ranking price and earnings momentum.


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