There are stocks hanging in there. Following Walmart’s sway on Thursday, investors once again purchased the drop, reducing overall losses. Only 0.4% separates the S&P 500 from its all-time high.
The market’s complacency coincides with Bank of America’s assertion that the S&P 500 SPX “is trading at more expensive levels than historical averages” according to 19 of the 20 valuation criteria it monitors.
But according to the BofA team, which is headed by equities and quant strategist Savita Subramanian, the Wall Street equity barometer has been statistically pricey for some time, and there are several reasons why the premium might be justified.
For instance, the index has been increasingly weighted toward highly profitable technology businesses in recent years, while balance sheets have become better and earnings visibility has increased. Businesses have effectively transitioned from the period of extremely cheap capital to one of increased efficiency.
Despite all of the optimism, the BofA claims that deregulation is one bullish element that has not yet been factored in.
Washington’s recent economic policy headlines “have been dominated by tariffs – perceived to be growth-negative – but a growth-positive component of Trump 2.0 is deregulation, via cost cutting and efficiency gains,” according to BofA.
The sectors most heavily reliant on red tape are the ones that stand to benefit the most from its reduction.
However, according to BofA, these sectors—consumer, big banks, commodities, transportation, and capital goods—are trading at substantial discounts to sectors with less regulation, such as telecoms, media, technology, and the consumer and professional services sector.
“We find a strong inverse relationship between the number of regulations…and forward P/E ratios – i.e., more expensive = less regulated,” according to BofA.
According to BofA, one of the most pronounced differences in this regulatory and value link is between technology and financials, which have had somewhat different outcomes since 2008.
Since then, compared to all other S&P 500 industries, technology has experienced growth, easier access to financing, and the least amount of regulatory expansion. According to BofA, financials, on the other hand, experienced the largest increase in regulations and spent the ensuing ten years integrating capacity and mending balance sheets.
“Today the two sit at opposite ends of the valuation spectrum, but history suggests that deregulation could ignite equal and opposite reactions – a relative re-rating in financials vs a relative de-rating in tech,” according to BofA.
