Want to beat the stock market in 2024? Here’s how to do it, according to Bank of America.
It’s a great time to be a stock picker, as the majority of the market is now represented by passive index funds.
More passive investors means that active investors can take advantage of opportunities in the stock market.
Here’s how to beat the stock market in 2024, according to Savita Subramanian of Bank of America.
The outlook for stock market outperformance has never been brighter as the investing world shifts away from active investing and toward passive investing, according to American bank Equity strategist Savita Subramanian.
In a recent note to clients, Subramanian highlighted that there are structural tailwinds for active investors in 2024 that will help them beat the stock market.
“The brain drain (20% less eyeballs on the sell side) and asset drain (40% less money) from active fundamental investing to passive and private equity suggest that equity markets may be less efficient and thus offer more alpha potential,” Subramanian said. “.
Passive investing It now represents 53% of U.S.-based assets under management, compared to 47% for active investing. Subramanian said the passive share in the US stock market could rise to even higher levels given that passive investing makes up 75% of the Japanese stock market.
David Einhorn, founder of Greenlight Capital, is concerned about the continuing rise in passive investing, Saying last week that it had “basically broken” the stock market – but he shares Subramanian’s conclusion that it represents an opportunity for active collectors.
Here’s how investors can capitalize on the rise in passive investing and beat the stock market in 2024, according to Bank of America.
“Pick stocks that act like stocks.”
“When we reduced our world to stocks that act like stocks, the fundamental signals improved dramatically,” Subramanian said.
In her analysis, Subramanian broke down Standard & Poor’s 500 They are divided into two groups: stocks that trade mostly on company-specific developments, and stocks that have less company-specific risks and are traded more in the macro environment.
Subramanian found that fundamental investment strategies based on earnings growth, return on equity, and analyst forecast revisions were more likely to generate outperformance than a group of stocks that traded mostly on company-specific news.
“Consumer, technology and healthcare companies are sectors where stock picking may be more beneficial, while sectors such as financials, utilities or commodities may be driven by macro cycles in prices, inflation and economic growth trends,” Subramanian said.
“Take the road less traveled.”
The stock market is highly efficient, but less efficient for companies that receive less research coverage from Wall Street.
A less efficient stock has much greater opportunity and risk than a company that almost everyone on Wall Street tracks and owns. This suggests that investors should focus their investments on less popular companies.
“When we restricted our universe to stocks with low sell-side analytical coverage — a less efficient universe — the performance of fundamentals improved dramatically,” Subramanian said.
“Expand your time horizons.”
With the advent of zero-day options, investors are becoming increasingly myopic, trying to make a quick profit. But this is not a sustainable practice when it comes to investing, especially if you are trying to outperform the broader market.
“As investors move en masse to the short term – we remind ourselves that the probability of losing money in the S&P 500 decreases from a coin flip to a 2 sigma event by extending one’s holding period from a day to a decade,” Subramanian said.
Time is on investors’ side, as long as they make use of it.
Editor’s Note: This story has been updated to reflect David Einhorn’s view that a market “broken” by passive investing still provides an opportunity for active stock pickers.
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