Bank of America Identifies 10 Reasons to Hold Onto Stocks Despite Recession Fears

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Bank of America has identified 10 compelling reasons why investors should hold onto stocks despite concerns over a looming recession. Strategists noted that bearish sentiment and positioning could potentially lead to upside in equities. While they remained neutral on stocks throughout 2023, they predicted the S&P 500 would experience a slight rise to 4000.

Even with fears of a downturn, the bank’s strategists urged investors to have faith in the cyclical sectors within the index, which had shown strong potential for growth. Despite inflation concerns and elevated interest rates, the S&P 500 had still seen a promising start to the year, with an 8% increase in stock prices since January.

So here are 10 reasons why they believe the current stock market upside could continue over the next quarter, including:

1. Extremely bearish market sentiment.

2. The majority of investors already expect a recession.

3. The Federal Reserve has room to loosen financial conditions if a recession does occur.

4. Record amounts of “dry powder” are sitting in venture capital and private equity firms, which could help buoy the market.

5. Long-only funds and hedge funds have shed exposure to cyclicals and are now near peak exposure to non-cyclicals.

6. The Japan Factory Automation Index has hit a trough, which typically leads to upside for a year and a half for Japanese FA stocks, which has a high correlation to US capital goods and materials stocks.

7. The equity risk premium should fall, particularly if corporate earnings bottom in Q4 2023. 8. The economy will see productivity gains from rising wage inflation.

9. Earnings quality is healthier than during a typical profits recession, with the proportion of high quality stocks in the S&P 500 at 60%+ and improving over the past 20 years.

10. Historically strong-return quarters are on the horizon for the market. Despite their positive outlook, they remained neutral on stocks overall in 2023 and predicted the S&P 500 to finish the year around 4000, a 3% drop from current levels, but still a 5% increase from the start of the year. Other banks are forecasting a relatively flat year for stocks in 2023.