In the second half of the year, Bank of America warns investors to pay attention to potential “pain trades” in the market that could go against the popular sentiment. One such trade to watch out for is the reversal in Big Tech stocks, which had a significant run-up in the first half of the year. While some mega-cap technology stocks like Nvidia drove the market to impressive gains, a rotation out of these stocks and into small caps has put pressure on the tech sector. As hopes for a monetary policy easing from the Federal Reserve grew, the Nasdaq Composite ended July lower by 0.8%. Bank of America predicts that the focus may shift away from tech stocks towards other sectors, causing pain for those heavily invested in tech companies if AI monetization diminishes.
Another potential “pain trade” identified by Bank of America is the risk of neglecting exposure to cyclical stocks despite softening economic data. The firm suggests that the lack of cyclical exposure in long-only funds may be extreme and not justified. With sectors like energy, materials, and financials showing strong performance in 2024, there could be opportunities for increased exposure in these areas. In a scenario of a soft landing with easing rate pressure, cyclical stocks may benefit. Bank of America specifically highlights the potential in sectors like energy and materials where funds have reduced their exposure compared to the S&P 500.
Bank of America also points out the danger of overlooking dividend-paying stocks as a potential pain trade for investors later in the year. Despite record inflows into bond funds, the firm sees more opportunities for yield in dividend-paying stocks. More than 200 S&P stocks currently offer higher real return potential than the 10-year Treasury yield of 2%. This means that investors could potentially earn higher returns from stocks compared to bonds. Bank of America believes that dividends may play a larger role in returns moving forward, emphasizing the importance of not ignoring this aspect of the market. The SPDR Portfolio S&P 500 High Dividend ETF has already seen strong gains year to date.
Investors should be mindful of the potential pain trades highlighted by Bank of America as they navigate the market in the second half of the year. From the reversal in Big Tech stocks to the importance of cyclical exposure and dividend plays, there are key areas to watch out for. By staying vigilant and considering these factors, investors may be better equipped to make informed decisions and avoid potential pitfalls in the market.