Investing.com -- Bank of America (BofA) said in a Friday note that today's high-quality stocks differ significantly from the quality stocks of the 2008 financial crisis.
As volatility rises, investors are increasingly drawn to high-quality stocks, but the dynamics of these assets have changed from what they were during the 2008 financial crisis.
BofA points out that high-quality stocks, those rated "B+ or better" by S&P, are no longer trading at the deep discount seen since the Tech Bubble. Instead, they’ve re-rated to a slight premium, which BofA argues is not a sign of overvaluation.
“The last two decades were anomalous, in our view: hyper-accommodative policy and ultra-low rates back-stopped risk-taking,” BofA strategists said in a note. “Finance 101 says predictability should trade at a premium to risk. Today’s quality premium is in line with its average premium pre-2000, marking simply a return to normalcy.”
“Today’s quality is not 2008’s quality,” the bank added.
BofA notes that cyclical sectors are frequently perceived as lower quality, prompting investors to favor defensive, secular growth areas. While cyclical sectors often carry higher betas, reflecting their perceived risk, the actual earnings volatility paints a different picture.
“Today some larger cyclical sectors have higher quality characteristics than defensives/secular growers,” BofA points out.
Financials, for example, now have the highest proportion of high-quality companies, and Real Estate has seen a major quality shift, with 70% of the sector’s market cap now classified as high-quality.
BofA also notes the S&P 500’s dividend payout ratio is near record lows, signaling safer and more sustainable dividends compared to 2008. This suggests dividends could contribute more significantly to total returns in the years ahead, especially as long-term price gains may be limited.
Also, the equal-weighted SPW has more stable earnings than the cap-weighted S&P 500, strategists added.