- Bank of America predicts large-cap value stocks will start to outperform growth stocks.
- Value has underperformed growth stocks for two decades but that could soon reverse.
- Bank of America noted four sector ETFs to buy to take advantage of the trade.
The most boring area of the stock market is poised for a "renaissance" of outperformance, according to Bank of America.
"Read my lips: Large. Cap. Value," Bank of America strategist Savita Subramanian wrote in a note.
According to the bank, boring value stocks, which have practically been left for dead as investors chase AI-fueled growth names, are set to outperform the broader stock market for the first time in a long time.
"After two decades of steady underperformance, US value may outperform growth again," Bank of America said.
According to the bank, there are three scenarios where value should be the preferred area of the stock market to own.
Broader earnings growth
"After a decade of underinvestment, low quality earnings, and the onset of inflation, corporates focused on efficiency should mean broader S&P 500 earnings growth through 2025," the bank said.
That means it won't be just the mega-cap tech companies driving earnings growth and higher stock prices.
"Value sectors starved for capital, such as energy with newfound capital discipline and financials with stronger balance sheets and better lending capacity should be rewarded as earnings growth catches up," Bank of America said.
A hard landing
Another scenario in which value stocks should outperform is if the economy experiences a hard landing.
That would likely lead to a sharp sell-off in growth-oriented stocks and the relative outperformance of value stocks.
"Equity allocations are near record highs, and if recession odds begin to rise, investors rotating from equities to bonds will necessarily be selling more growth than value," Bank of America said.
A 5% interest rate world
A "higher for longer" interest rate regime should benefit value stocks and drive their outperformance, according to the bank.
"US value stocks have lagged growth by an unprecedented 230% in the '2% world' interruption caused by peak globalization, deflationary technology, optimal demographics, and low debt burdens. A world of structurally higher rates and inflation should bolster value stocks," Bank of America said.
The bank said a reversion to the mean in interest rates and other macro factors could support an annualized five percentage points of outperformance for value stocks relative to growth stocks.
For investors seeking to take advantage of the potential value trade, the bank recommends investors take a look at four sector ETFs that are value oriented.
Utilities
"Utilities (XLU, FXU) have one of the lowest ETF valuation scores with P/Es at their lowest level since 2009 vs. the S&P 500. Utilities control the power required for AI to realize its potential," Bank of America said.
Energy
"Energy (XLE, OIH, MLPX) screens cheap at the sector and industry levels. Energy companies should benefit from tight markets and the embrace of capital discipline. Energy industries like services should benefit from rising demand while MLPs offer strong balance sheets, high yields, and access to supply-constrained natural gas markets," Bank of America said.
Banks
"Banks (KBE, KBWB) look more attractive today than the broad financials sector. Head of North American Banks research Ebrahim Poonawala expects strong mega-cap bank performance to continue and thinks regionals can get a boost from more certainty around Fed cuts," Bank of America said.
Consumer Staples
"Staples (IYK) ETFs look relatively cheap - understandable given recent concerns over consumer behavior. Sativa Subramanian is underweight staples, but in a hard landing scenario our stock analysts see scope for deeper food retail promotions, which should help boost volumes," Bank of America said.