Investing.com – Bank of America called mega-cap stocks “expensive and crowded,” while favoring mid-cap stocks for better opportunities in 2025.
“Megacaps are expensive and crowded, but smallcaps are in an earnings downturn and are at high refinancing risk,” the analyst wrote.
“Mid-cap companies have better fundamentals, less political risk, i.e. less labor intensity, attractive and more secure dividend yield, and investor negligence relative to both large and small.”
BofA notes that the sector's record dispersion in price momentum indicates a potential shift in market leadership. Similar trends were observed in 2000 and 2008, periods of significant market transitions.
Mid-cap stocks stand out as an attractive alternative, offering strong fundamentals, better dividend yields, and lower rollover risks compared to small-caps. They also face less political risk and receive less attention from investors than large caps.
Meanwhile, small caps are grappling with an earnings downturn and high refinancing risks, making them less attractive.
BofA sees a sustained run on value stocks as higher interest rates and earnings growth increase their appeal. The Russell 1000 Value Index now rivals growth stocks in quality, supported by lower valuations and lower concentration risk.
However, a return to zero interest rate policies or economic stagnation could challenge this outlook.
The market is shifting toward fundamentals-based stock picking, BofA says. With low peer correlations and increasing idiosyncratic risks, investors can benefit from long and short strategies focused on sector-specific winners and losers.
Post-election regulatory changes could also spur corporate consolidation, favoring undervalued companies.
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