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Bank of America sees stocks going nowhere next year and tech continuing to take hits

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The S & P 500 will likely end 2023 little changed from where it currently stands despite the concern of a recession, according to Bank of America. Savita Subramanian, the firm’s head of U.S. equity and quantitative strategy, predicts the index will end 2023 at 4,000 points, which would provide a small gain of about 1.3% from where it closed Monday. However, she said the market will see more turbulence as the economy likely faces a recession that is unlike previous ones. “Some of the biggest risks that we see over the next 12 months are driven by the fact that things are different this time,” she said in a note to clients, describing 2023 as “not your mom and dad’s recession.” Subramanian said Federal Reserve rate hikes will cause “more near-term pain” and could bring the economy into that recession. Still, she said the central bank has to be careful about a pivot, as the Fed easing on rate hikes amid a recession “has been the worst backdrop for stocks.” Investors should buy in the first half of 2023 because the recession will likely end by the third quarter, she said. The market typically bottoms six months before the end of a recession, Subramanian noted. To be sure, a variety of factors could influence the S & P 500’s performance. The bank’s more pessimistic outlook has the S & P 500 ending 2023 at 3,000 points – a 24% drop from where it closed on Monday. Its more optimistic outlook places the index at 4,600 points when 2023 ends, which would be an increase of about 16.5% from Monday’s close. With this in mind, Subramanian recommends that investors be overweight in energy, consumer staples, utilities and financials given their ability to perform consistently in times of economic contraction. Meanwhile, she said investors should have market weight exposure to industrials, health care and real estate. Tech was the latest addition to the list of underweights, with Subramanian citing its cyclicality and concerns over how it will be hurt by de-globalization. Within the S & P 500, information technology is down nearly 25% this year. Materials, communication services and consumer discretionary were other sectors she said investors should stay light in. ‘Not your mom and dad’s recession’ Factors that make this recession different from others include the following: Balance sheet health among corporations and consumers, as the former can impact earnings and the latter can inform how the Federal Reserve continues with interest rates A mandatory capital expenditure cycle that could drain corporate cash and keep inflation elevated Leverage risk at governments and central banks that is unprecedented and could be a “bubble.” A wider cross-section of investors within equities and cryptocurrencies, with less “liquid vehicles” like SPACs that performed poorly this year A central bank that is forced to handle a deeper recession in order to get inflation closer to its goal Subramanian forecasts earnings per share of $200 for the S & P 500 in 2023, reflecting a 9% year-over-year decline. This would be smaller than the typical 20% drop seen in a recession. Consumer discretionary has the biggest downside risk, she said, because it’s the hardest hit by inflation. But she said stock dividends should “hold up” given payout ratios are already near record lows, making them easy to repeat. — CNBC’s Michael Bloom contributed to this report.

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