Still underappreciated value stocks have proven a 'ballast' for investors, says BofA
Estee Lauder makes BofA's screen of high-growth stocks beyond AI.
In 2021, strategists at Bank of America's BofA Securities advised clients to "stick with large-cap value until everyone's talking about it."
In our call of the day, Savita Subramanian, head of U.S. equity and quantitative strategy for BofA Global Research, is sticking with that advice. She told clients the asset class remains "stubbornly under the radar," with those "stealth-strength" stocks fighting for attention.
The basic definition of a value stock is a company that trades below its intrinsic value, while fundamentals such as price to earnings suggest it's underpriced. Growth stocks, of which artificial-intelligence names are a big part of, tend to trade above their intrinsic value.
Subramanian argued that while the market seems dominated by megacap growth stocks, large-cap value has ranked No. 1 or No. 2 across four size and style categories in 2023, 2024 and 2025. "It has proven to be a ballast for investors amid volatile swings," she said.
The asset class is supported by demographics and a new interest-rate regime, where inflation-protected income is scarce, she said. With some caveats, rising interest rates and inflation often create a better environment for value stocks. One argument: those stocks can offer dividend streams and earnings in the near term, while growth names tend to rely on future cashflows, which can be more affected by rising inflation and interest rates.
Flagging a few more reasons investors should be pulling some value names into their portfolios, she said their regime indicator shows the business cycle remains in the expansionary midcycle for a fourth straight month. That's not bad news for growth stocks, but value names historically have seen more consistent outperformance.
Another feather in the cap for value is that while growth stocks generally lead during periods of profits that are slowing or scarce, profits are generally picking up and broadening out for companies. That has often worked out better for value as "investors can comparison shop for cheaper growth," she said.
Positioning, meanwhile, shows value is even more neglected by fund managers. She noted record underweights for financials among actively managed funds and light exposure across other value segments.
Some technology offerings are now value stocks as well. "Valuation is now capturing formerly high-multiple growth stocks at more attractive multiples by design, not just 'old economy' companies," Subramanian said.
Finally, the strategist said she's seeing signs of "AI fatigue" among growth investors, who are looking for diversification from pure AI via companies with buy ratings offering high long-term growth forecasts.
Here's a BofA screen of companies with five-year projected earnings per share growth in the top quintile of the S&P 500 that the firm has rated buy:
Estée Lauder Company name EPS growth Sector CNC Centene 42.16 Health care/consumer EL Estee Lauder 38.99 Staples XYZ Block 30.84 Financials LLY Eli Lilly 28.23 Health care HOOD Robinhood 27.88 Financials PODD Insulet Corp. 25.28 Health care CFG Citizens Financial 24.67 Financials DXCM DexCom 23.07 Health care C Citigroup 23.02 Financials ABBV AbbVie 21.57 Health care KKR KKR 21.26 Financials HUM Humana 20.89 Health care IBKR Interactive Brokers 20.20 Financials ARES Ares Management 19.35 Financials WELL Welltower 19.20 Real estate REGN Regeneron 18.85 Health care
Chart source: BofA U.S. equity & U.S. Quant Strategy, FactSet.
The markets
U.S. stock futures (ES00) (YM00) (NQ00) are climbing, led by tech as crude prices (CL.1) (BRN00) slide on Iran peace-deal hopes and Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD30Y fall. Bitcoin (BTCUSD) has topped $80,000.
Key asset performance Last 5d 1m YTD 1y S&P 500 7652.86 -1.19% 3.23% 11.79% 18.85% Nasdaq Composite 25,980.19 -2.49% 4.20% 11.78% 21.12% 10-year Treasury 4.685 -2.50 7.40 51.30 41.70 Gold 4686.3 6.76% 16.32% 8.17% 36.10% Oil 82.86 -1.85% 4.71% 44.33% 30.88% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
The docket of news was light ahead of Nvidia earnings and key inflation data on Wednesday.
A Pakistani official said significant progress was made in talks with Iran, while China said its cooperation with Iran should not be disrupted.
The semiconductor industry's "Hot Chips" symposium will begin at 8 a.m. Pacific time, with appearances by executives from Nvidia, Broadcom and more.
The S&P Cotality Case-Shiller home-price index is due at 9 a.m. Eastern, followed by new home sales and consumer confidence at 10 a.m. Richmond Federal Reserve President Thomas Barkin will speak at 4 p.m. The Treasury will announce the result of an auction of $69 billion auction of 2-year notes at 1 p.m.
S.E.C. investigating near-implosion of AI hedge fund.
The chart
Kit Juckes, chief foreign-exchange strategist at Societe Generale, says his chart shows how the second term of President Donald Trump is driving a weaker dollar than either U.S. economic performance or policy would indicate. The euro/dollar (EURUSD) should be trading around $1.12 - it's currently around $1.16 - but he said dollar strength will only return when domestic data gets stronger and pressures the Fed to tighten policy. The big problem with his chart is that it isn't Fed Chair Kevin Warsh "who is holding down the dollar, but the Treasury secretary, by keeping the market cost of money cheaper than the economy warrants," said Juckes.
Top tickers
These were the top-searched tickers on MarketWatch as of 6 a.m.:
Ticker Security name NVDA Nvidia SPCX SpaceX TSLA Tesla MU Micron TSM Taiwan Semiconductor Manufacturing MRNA Moderna AAPL Apple AMD Advanced Micro Devices META Meta INTC Intel
Macho man: tales of an 11th-century tapestry.
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