On screen disclaimer:
Please read important information at the end of this program. Recorded on 2/19/2025
Chris Hyzy
Hello, I'm Chris Hyzy. So much for the midwinter lull. From disruptive technologies to concern over interest rates and inflation, to a new administration charging out of the gate with new policy initiatives.
Lower third:
Chris Hyzy
Chief Investment Officer
Merrill and Bank of America Private Bank
The forces at work on the U.S. economy seem almost endless. What potential opportunities and challenges could they create and how might markets respond?
[Photo of Savita Subramanian]
On screen copy:
Savita Subramanian
Head of US Equity and Quantitative Strategy, BofA Global Research
Savita Subramanian, head of U.S. equity and Quantitative strategy for BofA Global Research, joins me for a look at current dynamics and what they might mean for the economy and investors.
Chris Hyzy
Savita, thanks for joining me today. So let's get right into it in terms of the markets. As we sit here today. I'm not going to get into surprises yet, but what are the trends in the markets that are now starting to gather momentum that really weren't there most of last year?
Lower third:
Savita Subramanian
Head of US Equity and Quantitative Strategy,
BofA Global Research
Savita Subramanian
Yeah, I think there are a few things that are happening this year that are a big difference from what we've seen over not just last year but the last few years. One, the market is starting to broaden out. So last year and the year before, we saw mega-cap tech companies really outperform the rest of the S&P. That's where the earnings were.
Lower third:
Market is broadening beyond just mega-cap tech companies.
Savita Subramanian
This year we're starting to see broader trends. So the equal-weighted S&P 500 is actually outperforming the cap weighted S&P 500.
Lower third:
Equal-weighted S&P 500: Higher exposure to smaller companies
Market cap-weighted S&P 500: Greater exposure to larger companies
Technology companies are spending a tremendous amount on CapEx and they're spending on everything. They're not just spending on tech, they're spending on building out capacity manufacturing.
Lower third:
CapEx = Capital Expenditures
Investments in assets like property, equipment, or technology
Savita Subramanian
And this is a benefit to almost every stock in the S&P 500. If you think about this from a sectoral perspective. It's also a benefit to GDP growth. It's a benefit to consumption. So this is one of the reasons we think we're seeing the market broaden out is that we're moving from an environment where, you know, for the last 10 or 20 years, almost every company in the S&P outside of tech has been spending on tech.
Lower third:
Tech spending in different industries is adding to market broadening.
Savita Subramanian
Tech has been getting the money. And today tech is actually spending a sizable chunk of change on other types of industries. So I think that's something worth watching.
Chris Hyzy
One that we always talk about but rarely discuss it today versus what it used to be: valuation. Are you worried about it?
Savita Subramanian
Valuation. Yes. We get this question quite a bit. And, and valuations are certainly not low on a statistical, pure numbers basis.
I think one, one caveat would be if you look at the makeup of corporate America today, it's very different than it has been over the last few decades. You know, 20 years ago, 80% of the benchmark was financials or asset-intensive companies that had very high fixed costs.
Lower third:
50% of the S&P 500 is health care and technology, which are asset-light sectors.
Source: BofA Global Research, February 2025
Savita Subramanian
Today, most of the market 50% of the S&P 500 is health care and technology. These are two very asset-light sectors that have higher margins, lower fixed costs, lots of ability to, you know, kind of generate or stabilize margins.
And then the rest of the S&P 500 is on the path to getting more efficient. And I think this is the real bull case for U.S. equities, is that you've seen companies that are labor intensive start to think about how to become more efficient.
And we've seen this happen across the board, which is one of the reasons that I think that S&P 500 margins have remained relatively healthy despite the fact that we've seen rampant inflation over the last few years.
Chris Hyzy
What other positives out there do you foresee unfolding between now and the end of the year? If you had to just think from your perch?
Savita Subramanian
I think what, what we're seeing right now is the seeds sown for another productivity cycle, kind of like what we saw in the 80s and 90s with the advent of PCs, internet, and then eventually cloud.
Today we've got AI, you know, monetization is to be determined, but we're already seeing really interesting automation cases outside of AI, in robotics and digitization. There are lots of different ways that corporations are flexing that efficiency angle. And it's not just about generative AI.
Lower third:
Robotics and digitization are helping corporations become more efficient.
Savita Subramanian
Reshoring, if you think about the amount of activity that the U.S. used to do from an import export perspective, a lot of that has been brought back to the U.S. Again, very positive for the U.S. economy, positive for GDP growth, positive for corporate profits.
Chris Hyzy
One thing that is certain is that there will always be uncertainty.
Savita Subramanian
Indeed.
Chris Hyzy
And we see it again unfolding this year. It's something that we have to deal with. Let's talk a little bit about the risks that you might see now, or at least unfolding as we head towards the latter part of this year and into next. What would they be?
Savita Subramanian
Yeah, I mean, I think that a lot of what we've heard from investors is a fear of stagflation, which is not without merit. I mean, we could be in an environment where interest rates remain high, where we see the cost of capital even rise if interest rates continue to rise. That is a risk to growth. Right now it feels like Goldilocks, but that could quickly change to stagflation. So that's something we're watching very carefully.
Again, uncertainty around corporate policy creating sort of a self-fulfilling slowdown amongst corporations that are unable to plan. That's another risk. I think other, other areas like, you know, continued, you know, geopolitical strife. That is definitely something that has been costly in terms of the flow of goods and services and information across the world.
Chris Hyzy
If we were to get some volatility, that would concern the broader investment community. What what's your counsel to them?
Savita Subramanian
I think volatility is always an opportunity. There is always a bull market in some component of capital markets.
Lower third:
Cyclical companies are sensitive to the business cycle and have done well when the economy is strong.
Today. I think the bull market is really in more domestically focused, cyclical companies that could benefit from reshoring, from continued strong GDP growth. And those are areas that are relatively undervalued. Probably not going to take as much of a hit if tech disappoints than the, you know, Magnificent Seven companies.
Lower third:
Today's tech companies are much stronger financially than those of the 1990s and early 2000s.
I think also, when you think about mega-cap tech, these are not the tech companies of the late 90s and the early 2000s. These are companies that have healthy balance sheets. They have options to, you know, reduce growth and return more capital. Many of them are paying dividends, which is a huge difference from the 90s. So I think that even that ballast of mega-cap tech in the S&P looks far healthier than one could argue in prior, kind of bubble-like territories.
Chris Hyzy
That's amazing. Savita, thanks for joining me today.
Savita Subramanian
Thank you. Great to be here.
Chris Hyzy
I hope you found this program informative and useful. In these few minutes we've only scratched the surface of these rapidly changing market dynamics. Check back with us frequently for updates as conditions evolve. Meanwhile, keep in mind that times of rapid change usually come with short-term volatility. These may create potential opportunities to add to your portfolio. There's never been a better time to stay diversified both across and within asset classes.
Follow the news but filter out the noise and stay focused on a long-term strategy built around your personal goals.
On-screen copy:
Important disclosures
The opinions expressed are as of 2/19/2025 and are subject to change.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Bonds are subject to interest rate, inflation and credit risks. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.
This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
BofA Global Research is research produced by BofA Securities, Inc. ("BofAS") and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC popup, and wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
Merrill makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of BofA Corp. MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of BofA Corp.
Merrill Private Wealth Management is a division of MLPF&S that offers a broad array of personalized wealth management products and services. Both brokerage and investment advisory services (including financial planning) are offered by the Private Wealth Advisors through MLPF&S. The nature and degree of advice and assistance provided, the fees charged, and client rights and Merrill's obligations will differ among these services. The banking, credit and trust services sold by the Private Wealth Advisors are offered by licensed banks and trust companies, including Bank of America, N.A., Member FDIC, and other affiliated banks.
Bank of America Private Bank is a division of Bank of America, N.A., Member FDIC and a wholly owned subsidiary of BofA Corp. Trust and fiduciary services are provided by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A.
Investment products:
| Are Not FDIC Insured |
Are Not Bank Guaranteed |
May Lose Value |
© 2025 Bank of America Corporation. All rights reserved. 7668069 - 2/2025
[End of transcript]
"The market is starting to broaden out. Last year and the year before, we saw mega-cap tech companies outperform the rest of the S&P. This year we're starting to see broader market trends," she adds, pointing to increased productivity and reshoring of manufacturing to the U.S. as two positive forces poised to drive potential market growth beyond the tech sector.
But uncertainty and risks still exist. In the above video, Subramanian chats with Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank, about the forces driving equity performance and addresses questions top of mind for investors now.