With the Dow Jones industrial average breaking above 22,000 for the first time ever in recent weeks and the Standard and Poor’s 500 index knocking on the door of 2,500, some investors are growing a bit skeptical about the bull market’s longevity.
In a new research note, Bank of America recommends that investors take profits on some of the best-performing stocks and sectors.
Bank of America reiterated its year-end price target for the S&P 500 of 2,450, suggesting U.S. stocks will deliver a negative overall return in the second half of the year.
“What I worry about are the really crowded areas of the market, areas that managers have converged into like technology,” Bank of America head of U.S. equity strategy Savita Subramanian says. “Technology is the most overweighted sector by fund managers that we’ve seen since 2008, so I think that there are pockets that are showing maximum ownership.”
After more than an eight-year rally, U.S. stocks are facing two major headwinds: monetary policy tightening and flattening earnings growth, a combination that could limit further market upside in the quarters ahead.
According to Bank of America, investors looking to dial back their exposure to the red-hot technology sector should consider high-quality bonds and financial sector stocks.
In addition, Subramanian said investor skepticism about tax cuts and infrastructure spending policies out of Washington has created some surprising buying opportunities.
“Stocks that would benefit the most from tax reform are now selling at a deeper discount to the market than they were pre-election,” Subramanian said.
In April, Strategas Research Partners included Caterpillar (NYSE: CAT), Cisco Systems (CSCO), Pfizer (PFE), Ralph Lauren Corp. (RL) and Western Digital Corp. (WDC) in its repatriation basket. The five companies were chosen based on their relatively high levels of offshore cash compared to their market capitalizations.
Bank of America isn’t…
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