Morgan Stanley: "Give up" large-cap tech and mid-cap stocks, and the S&P 500 value index is also "very fragrant"

Bank of America says investors should put large tech stocks and small caps on the side and consider investing in the S&P 500 index. Savita Subramanian, head of U.S. equities and quantitative strategy at the bank, said in a note Wednesday that a key reason investors are seeking to diversify beyond large caps is to consider the S&P 500 index.

Growth in earnings is one. The remaining 493 stocks in the S&P 500 index are expected to post an 8% increase in earnings in the second quarter, up from the 7% decline in the fourth quarter of last year, according to Subramanian.

But she said small-cap stocks tracked by the Russell 2000 index are in a profit slump that has persisted since the fourth quarter of 2022. Earnings for the S&P 600 index are down 11% year-over-year so far this quarter.

Meanwhile, Subramanian said while large caps have dominated recent market rallies, the trading price of the S&P 500 index is “significantly cheaper” than the S&P 500 index, approaching “tech bubble” levels.

“The S&P 500 is 8% more expensive than the Russell 2000, and historically that’s been 1%,” she said, adding that “don’t forget about risk, and given the current equity risk premium, the equal-weight S&P 500 should have a 12% premium to the S&P 500 in other conditions.”

The iShares S&P 500 Equal-Weight ETF has $53.4bn in assets and is up more than 6% since the start of the year.