Bank of America's research team said rising election uncertainty could definitely contribute to a market pullback in the coming months.
The bank anticipates greater volatility in the markets and recognises the possibility of a “5-10%” decline in US equities.
However, Savita Subramanian, head of U.S. equity and quantitative strategist at Bank of America, argues that investors may overestimate the impact of politics on markets.
Responding to a question from Investing.com during the bank's media roundtable, Subramanian noted that certain sectors could face pressure due to the possible change in leadership at the White House. He also expects a rally during the election campaign.
Health care, for example, is seen as vulnerable from both sides of the aisle given its exposure to government contracts, while green energy is likely to suffer if Republicans take power.
In addition, the tech sector could face additional regulatory risks if Democrats remain in power, while smaller regional banks are also at risk from increased regulatory scrutiny.
Despite these concerns, Bank of America maintains a positive outlook on the US economy, which, although cooling, is still perceived as strong.
Unlike some of its peers, the bank has opted not to modify its target price at this stage. Instead, Subramanian would like to ride out the election uncertainty and then revise his S&P 500 target price, especially if mega-cap strength persists.
During the presentation, Bank of America said that current positioning favors countercyclical, pro-growth and pro-technology investments, so there is plenty of room for sector rotation to continue.
The bank also noted that not all tech stocks are overvalued, and that some of the 'Magnificent 7' companies are considered value stocks due to their ability to return capital while continuing to grow.
Finally, the banking giant expects equity investors to likely become the next major buyers of stocks.
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