BofA touts 'value' and ESG stocks, cautious towards S&P 500

Strategists at Bank of America pointed clients towards so-called 'value' stocks for the next few months, highlighting a slew of factors which, they said, should see them outperform as the US economy moves out of the deep recession phase and into a recovery.

They were more cautious however for the broader S&P 500, warning of the possible "unintended consequences" of "borrowing from the future" to finance current growth, including rising capacity and a splurge on share buybacks.

BofA had recently raised its target for the S&P 500 from 2,600 points to 2,900.

And things didn't end there.

"Post-election, risk of increased taxes and less tolerance for buybacks is likely," they said.

"And Millennials, the largest US age cohort, may adopt a depression-era spend mentality after suffering first the Financial Crisis and now COVID-19."

For value stocks nevertheless, the recovery phase, improving credit conditions, valuations, dispersion in price-to-earnings multiples, US Japanification and an expected trough in corporate profits in the third quarter were all arguments in favour, BofA argued.

BofA also called attention to the sustained inflows, less negative earnings revisions and premium being paid by investors for funds with high Environmental, Social and Governance (ESG) scores.

"Investors today are now paying a 30% premium for companies with high scores vs. their counterparts with lower scores (vs. 20% discount a decade ago), and the recency bias in behavioral finance suggests this premium could widen in years to come. See inside for top/bottom ESG scores."