Investing.com -- Bank of America called the mega cap stocks “expensive and crowded” while it preferred mid-cap equities for better opportunities in 2025.
“Mega caps are expensive and crowded but small caps are in an earnings recession and have high refinancing risk,” analyst wrote.
“Mid caps sport better fundamentals, less policy risk i.e. less labor intensity, attractive and safer dividend yield, and investor neglect relative to large and small.”
BofA notes that record sector dispersion in price momentum signals a potential shift in market leadership. Similar trends were seen in 2000 and 2008, periods of significant market transitions.
Mid-cap stocks are highlighted as an attractive alternative, offering solid fundamentals, better dividend yields, and lower refinancing risks compared to small caps. They also face less policy risk and receive less investor attention than large caps.
Small caps, meanwhile, are grappling with an earnings recession and high refinancing risks, making them less appealing.
BofA sees a sustained run for value stocks as higher interest rates and profit growth boost their appeal. The Russell 1000 Value index now rivals growth stocks in quality, supported by lower valuations and reduced concentration risk.
However, a return to zero interest rate policies or economic stagnation could challenge this outlook.
The market is shifting toward fundamentals-driven stock picking, BofA says. With low pairwise correlations and rising idiosyncratic risks, investors may benefit from long-short strategies focused on sector-specific winners and losers.
Post-election regulatory changes could also spur corporate consolidation, favouring undervalued companies.