The U.S. stock market is about to undergo a "regime change" that will cause a fundamental reordering of which stocks will perform best, according to Bank of America Merrill Lynch strategists.
As Federal Reserve monetary stimulus winds down, investors have been looking to place their bets as to what sectors and areas of the market will perform best.
Many have been focusing on non-U.S. equities, fixed income and funds that provide cushions against volatility in the currency market.
BofA, though, suggests a different approach: focusing on "cash-rich, self-funded companies" that are generally considered of superior quality than the high-debt cyclical stocks that have benefited greatly during the post-crisis bull stampede that has seen the S&P 500 surge more than 210 percent since March 2009.
In other words, investors should buy "high" quality and sell "low," a twist on the proverbial goal of buying low and selling high in price terms. The move, according to the strategists, is "the single most important trade for the next regime." (Tweet This)
"The U.S. is in the process of a regime change, and we think high quality stocks will be the biggest beneficiaries for the same reason that low quality won in the last regime: liquidity," Savita Subramanian, BofAML equity and quant strategist, and others said in a report for clients. "Valuations of risky stocks have been buoyed by 15 years of fiscal and monetary stimulus."
Indeed, the Fed has grown its balance sheet by nearly $4 trillion during three rounds of quantitative easing, or the monthly asset purchases of Treasurys and other securities. The central bank simultaneously has kept its target funds rate, which sets the benchmark for most other interest rates, anchored near zero since late 2008.