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Tag: Savita Subramanian

  • Wall Street says buy stocks that pay dividends with $6 trillion of cash ready to be deployed

    Wall Street says buy stocks that pay dividends with $6 trillion of cash ready to be deployed

    Getty Images; Chelsea Jia Feng/BI

    • Dividend stocks are set to surge as investors deploy $6 trillion from money-market funds, Bank of America says.

    • Investors could be looking to invest their cash as the Fed gets ready to cut interest rates in September.

    • BMO agrees, and recommends high-yielding stocks including Abbvie, Chevron, and Gilead Sciences.

    Dividend-paying stocks are poised to surge in the second half of the year as investors start to deploy the $6 trillion sitting in money market funds, according to Bank of America.

    Strategist Savita Subramanian called the dividend trade a “pain trade,” meaning the bulk of investors are not properly positioned for the potential upside gains in dividend-paying stocks.

    “Over $6 trillion sits in US money market funds as the Fed is poised to start cutting rates,” Subramanian said in a note this week. “Bond funds have seen record flows YTD, but we see more opportunities within equities for investors searching for yield.”

    There are more than 200 S&P 500 stocks that offer a higher real return potential than the 2% offered by the 10-year Treasury yield, according to the note, and about 75% of those stocks are under-owned by professional investors.

    Some of the highest-yielding S&P 500 companies include Walgreens Boot Alliance, Altria, Verizon, Ford, and AT&T. And while the S&P 500 as a whole offers a dividend yield of about 1.25%, there are nearly 300 S&P 500 stocks that offer a higher yield.

    “Overall, we expect dividends to make up a larger proportion of returns than the outsized price returns and multiple expansion of the past decade,” Subramanian said.

    BMO’s Brian Belski is another Wall Street strategist who expects big gains to be had from dividend paying stocks, especially after their lackluster performance since the October 2022 stock market bottom.

    “We believe these stocks have turned the corner and recent relative strength is likely to persist in the coming months,” Belski said in a note on Tuesday. “With the Fed now likely to cut rates sooner than previously anticipated, the likely drop in longer-term yields in response should provide a boost.”

    Some of the high-paying dividend stocks recommended by Belski include Abbvie, Chevron, Duke Energy, Gilead Sciences, and Pfizer.

    As investors hunt for yield at a time when interest rates are about to fall, dividend-paying stocks could be the underloved area of the stock market that is set to boom.

    The Fed is expected to make its first interest rate cut of the current cycle at its September FOMC meeting.

    Read the original article on Business Insider

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  • Why investors should buy into an ‘egregiously expensive’ stock market, Bank of America says

    Why investors should buy into an ‘egregiously expensive’ stock market, Bank of America says

    REUTERS/Dario Cantatore/NYSE Euronext

    • The stock market may be expensive based on traditional measures, but that doesn’t mean investors should avoid stocks.

    • Bank of America said comparing present valuations to the past is comparing apples to oranges.

    • “The S&P 500 is half as levered, is higher quality and has lower earnings volatility than prior decades,” BofA said.

    The stock market “is egregiously expensive” relative to its past, but that doesn’t mean investors should avoid stocks, according to a Wednesday note from Bank of America’s Savita Subramanian.

    The US equity strategist said that while the S&P 500 is “statistically expensive on 19 of 20 metrics and is trading at a 95th percentile price to trailing earnings ratio based on data back to 1900,” it doesn’t mean that stock prices can’t continue to rise from here, and for good reason.

    In particular, Subramanian took issue with comparing current stock market valuations to the past, when the composition of the S&P 500 looked a lot different.

    “I think the one bear case that I hear a lot that I want to try to debunk is just the idea that the market is too expensive,” Subramanian told CNBC on Wednesday. “Folks will take today’s S&P and compare it to 10 years ago, 20 years ago, 30 years ago, 40 years ago. I don’t think that makes sense because the market today is such a different animal.”

    The S&P 500 currently trades at a 12-month trailing price-to-earnings ratio of 24.5x, well above its 10-year average of 21.1x. Meanwhile, the S&P 500’s forward price-to-earnings ratio is 20.4x, more than one standard deviation above its 30-year average of 16.6x.

    But maybe the S&P 500 should trade at a higher valuation than it did 30 years ago when considering that the underlying companies within the S&P 500 are much more profitable today than they were in the past, Subramanian suggests.

    “The S&P 500 is half as levered, is higher quality and has lower earnings volatility than prior decades. The index gradually shifted from 70% asset-intensive manufacturing, financials and real estate companies in 1980 to 50% asset-light Tech & Health Care,” she explained.

    And that different composition shows up in the S&P 500’s profit margins, which have doubled from less than 6% in the 1980s to nearly 12%.

    “We’re in a different ball game here so you can’t just look at the S&P today and take that P/E and compare it over time,” Subramanian told CNBC.

    All in, despite the historically high market valuations, stock prices will likely continue trending higher as long as corporate earnings don’t plummet from their current levels.

    “This realistic good case scenario suggests a fair value for the S&P 500 of ~5500,” Subramanian said, representing potential upside of 9% from current levels.

    Read the original article on Business Insider

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