Bank of America Urges Investors: “Own the U.S. for Growth, the World for Value”

A rare window of opportunity is emerging for both American growth and global value investors

Bank of America (BofA) is advising investors to capitalise on a unique market backdrop by maintaining exposure to U.S. growth stocks while allocating fresh capital to undervalued international assets. In its latest strategy update, the bank highlights what it sees as an unusual opportunity where both sides of a diversified portfolio – high-growth U.S. stocks and global value plays – can perform well.

Bullish on U.S. Growth

BofA strategists, led by Jared Woodard, argue that conditions in the U.S. remain favourable for growth-focused investors. Several factors underpin this view:

• Expectations for up to three Federal Reserve interest rate cuts in the coming year
• A weaker U.S. dollar supporting domestic production
• Sustained investor enthusiasm for artificial intelligence (AI) and semiconductor stocks

The bank suggests remaining “long on chipmakers and AI enablers,” noting continued investment by tech giants (hyperscalers) and a broadening interest in companies benefiting from the AI revolution.

According to BofA, the current bull market still has room to run, provided liquidity remains sufficient and leverage manageable. “Bull markets typically end when meagre liquidity meets high leverage,” the strategists said. As of now, neither appears to be a major concern.

Global Value Is Gaining Momentum

While recommending U.S. growth for existing holdings, BofA suggests new investment capital should be deployed into international value markets. This strategy offers:

• Lower correlation to U.S. growth, providing diversification
• Attractive valuations in emerging markets (EMs) and small-cap value stocks
• Higher yields, particularly in EM dividend strategies and EM debt

The bank notes that global equities – excluding the U.S. – are set to outperform U.S. markets by over 15 percentage points, marking the strongest gap in three decades.

“Value never stopped working outside the U.S.,” BofA reports, citing robust long-term performance in Asian and emerging markets compared to the prolonged underperformance of value stocks in the U.S.

Macro Trends Support a Global Shift

BofA ties its recommendation to broader macroeconomic shifts, including:

• Countries increasingly aiming for self-reliance and building domestic supply chains
• A reduction in global trade imbalances
• A weaker U.S. dollar lifting international consumption, commodity prices and EM debt

These factors, the bank believes, are reshaping the global economic landscape and enhancing the case for allocating more capital internationally.

Caution for U.S. Equities

Despite their near-term optimism for U.S. growth stocks, BofA also sounds a note of caution. Their valuation model forecasts a 10-year expected real return of –0.1% for the S&P 500. This implies that investors relying solely on U.S. equities may face diminished returns in the long term.

The report also warns that large-cap tech firms, which have led the market in recent years, are becoming increasingly capital-intensive. If their fundamentals falter, a valuation correction similar to the “Nifty Fifty” sell-off in the 1970s could occur.

Investment Takeaways for UK Investors

• Stay invested in U.S. growth, particularly AI and semiconductor sectors, while monitoring valuation risks.
• Diversify into global value stocks, especially small-cap, EM dividend, and debt strategies.
• Watch currency trends – a weaker dollar typically benefits international holdings and commodity investments.
• Prepare for potential volatility if U.S. growth falters or interest rate expectations shift.

As markets navigate evolving macroeconomic conditions, BofA’s dual approach of combining resilient U.S. growth with undervalued global assets offers a compelling roadmap for investors looking to optimise returns in 2025 and beyond.

Sources: (Investing.com, Reuters.com)