Bank of America told clients in a note on Friday to position portfolios toward higher-quality, large-cap value equities to navigate what the bank describes as an extended period of geopolitical turbulence, oil-related inflationary pressure and the risk of a renewed credit cycle.
The guidance comes in a strategy memo authored by analyst Savita Subramanian, which the bank frames as an investing roadmap for "war, oil spikes, a credit cycle and Volatility with a big V." The note examines past market behavior around shocks, the economic effects of rising crude prices, and areas of vulnerability inside the financial sector.
On the question of whether investors should buy the dip produced by the recent geopolitical tensions, BofA points to historical patterns. The bank notes that past shocks produced an average S&P 500 decline of roughly 10% that subsequently more than recovered over the following three months. Still, Subramanian cautions that the current episode has not produced the same scale of decline so far, with the S&P 500 down approximately 4% since the start of the Iran-Israel-U.S. conflict.
That relatively small market move, the note says, may reflect an underreaction. The bank also flags an important market liquidity constraint: institutional cash balances are at five-year lows, limiting the ability of large buyers to step in and purchase further weakness.
Energy and consumer dynamics receive focused attention. BofA observes that a 10% increase in West Texas Intermediate crude has historically corresponded to about a 2-3% increase in S&P 500 EPS growth, a result that the bank characterizes as mixed. While some earnings benefit in aggregate, supply-driven oil spikes have in the past damaged equity performance overall and act like a regressive tax on consumers, weighing on broader demand.
Subramanian also pushes back on hopes for materially more U.S. liquefied natural gas exports as a source of relief, arguing that the United States is already exporting as much LNG as it can.
On credit and banking sector risk, BofA highlights weakness among financial stocks but stresses the selloff has been uneven. The bank expresses continued conviction in Global Systemically Important Banks, noting those institutions tend to exhibit lower leverage and face more intensive regulatory oversight.
In a market regime the bank expects to be marked by elevated volatility, BofA favors quality - which it defines in terms of earnings stability - and finds that large-cap value currently scores higher on quality metrics than growth. That leads to the bank's recommendation to lean into higher-quality, large-cap value names as a defensive posture across portfolios.