There's a better way to put money to work in the stock market right now, according to Bank of America. Savita Subramanian, head of U.S.
equity and quantitative strategy at the firm, recommends investing in the equal-weighted S & P 500 rather than the capitalization-weighted S & P 500 index now, saying valuations are more compelling there. The S & P 500 is higher by more than 14% this year, even after the recent volatility. On the other hand, the S & P 500 Equal Weight index has advanced by less than 7%.
The equal weighted S & P 500 index's valuation is "approaching a record discount," Subramanian wrote on Wednesday. "Even with mega-caps leading the market lower in the recent pull-back, the equal weighted S & P 500 is trading at an extreme discount to the S & P 500, approaching Tech Bubble levels." .
SPXEW YTD mountain S & P 500 Equal Weight The strategist expects that the equal-weighted benchmark may prove a means of capturing a broadening out in stock performance from the mega-caps that dominated this year's early rally, especially as she anticipates that earnings — not price-to-earnings multiples — will be the "primary driver" of returns going forward. The S & P 500 without the so-called " Magnificent Seven " stocks is on pace to grow earnings by 8% year-over-year in the second quarter, the first period of growth for the rest of the market since the end of 2022, she said. Other parts of the market appear to be even better bargains, Subramanian said.
For example, the large-cap S & P 500 Equal Weight is 8% more expensive than the small-cap Russell 2000 index of small company shares, she noted. But the S & P 500 Equal Weight has another advantage: it's inherently less risky, as large-caps are easier to trade in and out of than the small-cap market. That could also help the equal-weighted benchmark outperform.
"Don't forget risk: the SPW sports a lower beta (0.9) than the cap-weighted S & P 500 (1 by definition) and a much lower beta than the Russell 2000's beta of 1.1," Subramanian said.
"Based on the current equity risk premium, the equal-weighted S & P 500 should trade at a premium to the S & P 500 and should trade at a 12% premium to the Russell 2000, all else equal." One way to play the BofA call is through the Invesco S & P 500 Equal Weight ETF (RSP) ..
