- Stocks have largely priced in the impending stimulus package and may sell off once the bill is passed, says BofA.
- Cyclical stocks and small-caps are still trading at a discount and will be “clear winners” in a sell-off, the firm said.
- Sign up here for our daily newsletter, 10 Things Before the Opening Bell.
The stock market has largely priced in Washington’s $1.9 trillion stimulus plan already and investors should anticipate a “sell the news event” once the bill is passed, according to Bank of America.
A group of strategists led by Savita Subramanian said in a note Friday that cyclical stocks and small caps will be “clear winners” in the event of a stimulus-induced sell-off.
Cyclical and small caps are highly GDP-sensitive and still trade at a steep discount, said BofA. In comparison, large-cap consumer discretionary and information technology stocks are priced to the downside.
Most of BofA’s indicators suggest that stocks are currently pricing in a lot of good news. For example, the ratio of the S&P 500 market capitalization and the M2 money supply is at its highest point since Feb 2020, and well above the post-financial crisis average as optimistic investors pile their cash into stocks.
According to the strategists, the ratio currently indicates that over $3 trillion in stimulus may already be priced in.
Bank of America also warned that stocks are currently pricing in a 1.4% yield on the 10-yr treasury. If that rate is to move up to 1.75% by the end of 2021, the long-standing “TINA” mantra that proposes “there is no alternative to equities” may be at risk.