"A full-fledged bear market (i.e., 20%+ drop) is unlikely: just 50% of the signposts that historically preceded S&P 500 peaks have been triggered vs. an average of 70% ahead of prior market peaks," Subramanian, who's BofA's head of US equity strategy, wrote in a recent note.
The S&P 500 has fallen as much as 8.5% from its mid-July peak, which caught many investors flat-footed after an excellent six-and-a-half-month stretch to start the year.
However, Subramanian noted that such a pullback isn't out of the ordinary. A typical year contains a 10% correction and three separate 5% selloffs, based on BofA data since 1930.
Bank of America
"Larger corrections are less frequent but still common, with 10%+ corrections occurring once a year on average (the last one was in fall 2023), 15%+ corrections occurring once every two years on average, and 20%+ corrections (i.e., bear markets) occurring once every 3-4 years on average," Subramanian wrote.
With that in mind, US stocks were "effectively due" for a drawdown, Subramanian wrote. So when July's jobs report disappointed and the Federal Reserve declined to cut interest rates while Japan's central bank hiked, investors fled for the exits, causing volatility to spike.
42 stable stocks to buy in a wild market
Even after the early-August market meltdown, Bank of America strategists are sticking with their year-end S&P 500 price target of 5,400, which is roughly 3.4% above where the index is trading.
But although the US economic expansion will likely continue, Subramanian wrote that investors should brace for continued volatility — especially in an election year.
Bank of America
The CBOE Volatility Index, or VIX, is well off its historic highs from earlier this week but remains elevated, and its current level signals that the S&P 500 will move 1.8% per day going forward.
In this turbulent backdrop, Subramanian urged clients to take a cautious approach — especially with the mega-cap technology stocks getting crushed in this selloff, given that their earnings growth is slowing while firms outside of the Magnificent Seven are seeing their profits surge.
Instead, the lead strategist recommends shifting toward stocks that others may view as boring. That includes large, value-oriented companies; dividend payers; firms that will benefit from capital expenditures unrelated to artificial intelligence; and high-quality stocks.
"The highest-quality stocks tend to outperform as the VIX rises while the lowest-quality stocks tend to lag the most," Subramanian wrote.
To that point, Bank of America shared a list of stocks designed to help investors "sleep at night." These companies all have buy ratings from BofA; are stable relative to the broader market, as measured by their five-year beta; are high quality, according to S&P Global; and have upside since they're underrepresented in long-only funds.
Below are the 42 stocks that fit that description listed in alphabetical order, along with the ticker, market capitalization, sector, industry, five-year beta, S&P quality rating, and relative weight in long-only funds for each. All have a five-year beta at or below 1 and a B+ quality rating or better.
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