Investors clinging to the S&P 500 aren't safe and should get out of crowded trades and into other areas like small caps, Bank of America's top stock strategist says

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© REUTERS/Dario Cantatore/NYSE Euronext
REUTERS/Dario Cantatore/NYSE Euronext

  • Investors clinging onto the S&P 500 aren’t safe, according to BofA’s Savita Subramanian.
  • The benchmark stock index is overcrowded, and any selling could spark more pain for investors. 
  • She encouraged investors to allocate more funds into overlooked areas of the market, like energy and small cap stocks.

Investors clinging to the benchmark S&P 500 shouldn’t get comfortable, and they need to get out of overcrowded stocks before mass selling drives more pain, according to Bank of America’s chief stock strategist Savita Subramanian.

“Everyone is talking about this recession, we’ve got the most telegraphed recession in the history of mankind coming up, and the problem is everyone is using muscle memory to go back into what they think of as the safest equity market, which is the S&P 500. Trouble is, if everybody is in the S&P 500, and they’re all selling at the same time, the S&P isn’t really that safe,” Subramanian said in an interview with Bloomberg on Wednesday.

Last year was dismal for stocks, with the S&P 500 losing 20% as the Fed jacked up interest rates and battled sky-high inflation. Market bulls are optimistic that the Fed could ease up on rate hikes this year and give stocks more room to breathe, but the Fed changing policy unlikely, Subramanian previously said, warning investors of a volatile January.

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But investors seeking shelter in the S&P 500 will only worsen the volatility, Subramanian warned, as are investors who are sticking to overcrowded sectors of the market like technology. She pointed instead to areas like energy and small cap stocks, which are relatively less crowded compared to the S&P 500 and could be a safer bet. 

“That’s really an area where you can get exposure to equities without the risk of everybody being crowded into the same index,” she added. 

 Subramanian predicted that a recession will cause the S&P 500 to plunge another 24% in the first half of the year, though the benchmark index would overall see flat returns in 2023. Other Wall Street analysts have also predicted a 20% drop in the first half, which could be a major buying opportunity for investors, Subramanian said.

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