‘Don’t Buy the Tech Discount:’ Where to Invest Instead as Market Gets More Volatile, BofA Says

• Market volatility will remain high for years to come, says Bank of America.

• The firm recommends avoiding the impulse to buy the continued decline in tech stocks.

• BofA said instead to look for high-quality names as well as dividend-paying utilities and real estate stocks.

The market is getting more volatile and stocks will remain choppy for years to come, according to Bank of America.

The firm says that in the short term, political uncertainty surrounding the election will keep the market moving. Looking ahead to the end of 2027, the yield curve signals more volatility, as the chart below shows:

Moreover, a BofA proprietary “regime indicator” has entered recession territory.

With these elements in play, the firm recommends defensive actions that generally outperform during periods of uncertainty or weakness.

“Quality, stability and income have shielded investors from previous volatile markets. We are recalibrating our sector calls to enhance these characteristics,” analysts wrote on Monday.

On the other hand, investors should avoid increasing exposure to the popular tech sector, the bank warned.

Even as the price changes help make megacap industry names cheaper, several qualities make this cohort a poor investment, the bank said.

“Don’t buy the technology discount,” analysts said. “We remain underweight in information technology, despite the arguments that it has been so beaten.”

The bank cited record levels in the sector’s enterprise value-to-sales ratio, a signal that these firms remain overvalued. Meanwhile, tech funds may soon face passive selling pressure as the S&P 500 prepares for new index cap rules.

Specifically, the index plans to reduce the weightings of equity funds with $350 billion in assets, Bloomberg reported. In this case, passive investment vehicles should restructure their holdings at the next quarterly rebalancing.

As volatility rises over the long term, quality and income should play a bigger role in portfolios, the analysts wrote.

While growth stocks made sense when borrowing costs were low until the 2010s, that’s changing — in the coming years, the bank expects single-digit yields.

Quality exposure also makes sense in the more immediate term, according to Savita Subramanian, BofA’s head of US equities and quantitative strategies.

“Don’t be a hero,” she told CNBC on Friday. “Only to park in safe full return vehicles where you get paid to wait.”

In a note last week, Subramanian noted that today’s quality stocks are not expensive, and those rated B+ or better are trading at a slight premium to their lower-quality peers.

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Meanwhile, utilities and real estate dividends should attract investors’ attention as interest rate cuts at the Federal Reserve have them looking for yield opportunities.

“Real estate dividends are likely more sustainable than during previous cycles, given that since 2008 the sector has doubled its proportion of high-quality (“B+ or Better”) market capitalization to 70%,” they wrote the analysts.

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