BofA’s Subramanian Takes ‘Flak’ For Street-Low S&P 500 Call

Being the biggest bear on Wall Street can be tough. Just ask Savita Subramanian, the head of US equity and quantitative strategy at Bank of America Corp.

Her caution on US stocks stems from concerns that rising leverage tied to the artificial intelligence build-out, coupled with unusually tight credit spreads, could be signaling an upcoming deterioration in the credit cycle. That’s left her with the lowest year-end target for the S&P 500 Index in a Bloomberg survey of more than 20 strategists. At 7,100, her call implies a 7.5% decline from Wednesday’s close.

“I get a lot of flak for my target, more than I’ve gotten in years,” Subramanian said in an interview. “Clients used to kind of caution me and say, ‘you don’t want to be too bullish,’ and now they’re like, ‘what is going on, Savita? When are you going to raise your target?’”

Subramanian is sticking to her target even after several of her peers raised theirs in recent weeks, including JPMorgan Chase & Co. strategists led by Dubravko Lakos-Bujas and Wall Street veteran Ed Yardeni earlier in August. The increases have pushed the average year-end target in Bloomberg’s survey to 7,901, 2.9% above Wednesday’s close and 11% above Subramanian’s target.

While Subramanian sees the allure of hyperscalers and megacap technology stocks, she said the group as a whole is teetering on the edge of underperformance.

“Some of these stocks are going to be great, some are not,” Subramanian said. “But I think the entire basket warrants an equal weight, if not an underweight” rating.

Meanwhile, the AI trade surged anew on Thursday, after Nvidia Corp.’s forecast for revenue to grow 70% over the next fiscal year eased concerns about the momentum of AI spending.

However, Subramanian said she needs to see “inklings of real monetization across the capex build-out,” particularly in AI, to turn bullish. Demand for compute capacity is extremely strong, she said, distinguishing the current technology boom from the dot-com era of the late 1990s.

While leverage is soaring, the companies borrowing now have better stories and balance sheets than during the dot-com boom, Subramanian added.

Her preferred part of the market is large-cap value stocks. She points to sectors including energy and financials, as well as some software companies, as areas with healthy businesses and clean balance sheets.

Changes in the composition of growth and value indexes this year have made value even more attractive, she said, with semiconductor stocks shifting from value to growth while software companies and some hyperscalers moved into value.

“It’s a no-brainer to me,” she said. “It’s a great way to screen for areas where you’re buying quality, but you’re not overpaying.”

This article was provided by Bloomberg News.