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Investing.com -- The S&P 500 index “has been statistically expensive for a while,” Bank of America strategists said in a Thursday note.
Out of 20 different valuation metrics, 19 suggest that the index is currently priced above historical averages.
“This historical premium may be warranted by compositional changes of the benchmark,” strategists led by Savita Subramanian noted. “Plus, earnings visibility has improved with healthier balance sheets and corporates pivoting from low-quality growth from free capital/ global cost arbitrage to efficiency."
“Some bullish signals are ebbing but we see bullish themes within the S&P 500," they added.
Despite the perception that policy headlines, particularly tariffs, are negative for growth, BofA pointed out that deregulation could be a positive factor through cost-cutting and efficiency gains.
Industries that are heavily regulated, including consumer sectors, large banks, commodities, transports, and capital goods, are trading at significant discounts compared to less regulated sectors like Technology, Media, Telecom (BCBA:TECO2m) (TMT), and Consumer & Professional Services.
The strategists highlight a strong inverse relationship between the number of regulations and forward price-to-earnings (P/E) ratios, indicating that “more expensive = less regulated.”
In their report, BofA strategists also pointed to a shift in sector valuations, with Financials seeing an upward movement and Technology experiencing a downturn.
Since 2008, Technology stocks have benefited from growth, access to capital, and minimal regulatory increases, while Financials have faced stringent regulations and have spent the past decade improving their balance sheets.
“Today the two sit at opposite ends of the valuation spectrum, but history suggests that deregulation could ignite equal and opposite reactions – a relative re-rating in Financials vs a relative de-rating in Tech,” strategists wrote.
This is further supported by the bank’s tactical sector framework, which now ranks Financials as the second most favorable sector, up from a middling position, while Technology has fallen to fourth place.