In a unique market environment, Bank of America has identified three sectors poised to benefit from the Federal Reserve’s unconventional dual approach of cutting interest rates while corporate profits rise. This rare combination, dubbed a “double whammy of stimulus” by BofA’s head of U.S. equity and strategy Savita Subramanian, presents a compelling investment opportunity.
Subramanian advocates for focusing on value stocks in real estate, financials, and energy sectors. Value stocks, which trade below their intrinsic value, tend to outperform when profits climb and interest rates decline. This scenario discourages hedging and encourages investment in stocks with higher potential returns.
“I think about where these assets sitting in retiree accounts and money market funds are going; I think they’re going into safe, stable income. That’s more value than growth,” Subramanian explained.
The real estate sector benefits significantly from the growing investments in data centers, a crucial element of the burgeoning artificial intelligence infrastructure. Meanwhile, the financial and energy sectors have showcased improved quality and capital returns over the past decade.
Subramanian highlights the attractiveness of high dividends in these sectors, particularly as short-term yields decline, making dividend-yielding stocks appealing to income-seeking investors.
Here are some notable ETFs performing well within these sectors:
Real Estate:
* iShares Core U.S. REIT ETF (USRT)
* Schwab U.S. REIT ETF (SCHH)
* SPDR DJ Wilshire REIT ETF (RWR)
Financials:
* SPDR S&P Regional Banking ETF (KRE)
* iShares U.S. Regional Banks ETF (IAT)
* SPDR S&P Bank ETF (KBE)
Energy:
* Direxion Energy Bull 2X Shares (ERX)
* Fidelity MSCI Energy Index ETF (FENY)
* SPDR Select Sector Fund – Energy Select Sector (XLE)
The identification of these value sectors comes at a time of considerable economic and political uncertainty. Investors are currently navigating U.S. economic uncertainties, shifts in Federal Reserve policy, and the approaching presidential election. The CBOE Volatility Index (VIX), a gauge for measuring market volatility, has climbed to around 20, a significant increase from its 2024 average of 14.8. This heightened volatility is typical during election years as investors weigh the market implications of policy proposals from candidates.
Steve Eisman, known for his role in predicting the 2008 financial crisis, recently withdrew his prediction of a Trump victory, adding further uncertainty to market forecasts.
These value sectors offer investors a potential avenue for growth and stability in a market characterized by volatility and uncertainty. The appeal of high dividends and their resilience to rate cuts make these sectors attractive options for investors seeking both income and potential capital appreciation.
