Bank of America says dump tech and buy industrials following Democratic sweep

Published Thu, Jan 7 20218:44 AM EST

Jesse Pound @/in/jesse-pound @jesserpound

(This story is for CNBC Pro subscribers only). The victories by Democrats in Georgia mean that investors should make a change to their sector allocations as the Biden administration's policies become more clear, according to Bank of America. The firm said in a note to clients Thursday that it was cooling on the tech sector and becoming more bullish on industrials as the Democrats gain control of the Senate. NBC News projects that Rev. Raphael Warnock and Jon Ossoff have won the Senate runoffs in Georgia , giving the Democratic party narrow control of both houses of Congress. On Wednesday, as the election results became more clear, the 10-year Treasury yield broke above the 1% level for the first time since March . Bank of America upgraded industrials to overweight from market weight, and downgraded the tech sector to market weight from overweight, citing the rising rates and President-elect Joe Biden's tax and spending plans. "Potential tax implications for Tech as well as potential for a stronger cyclical recovery could drive institutional investors out of growth and Technology and into deep cyclicals where they are currently underweight," the note said. The firm estimated that Biden's tax plan, if implemented, would shave 7% off of earnings per share for the S & P 500, with the tech sector taking the biggest hit. "One of the biggest concerns from a Dem sweep has been higher corporate taxes(although not likely to emerge until 2022) where we expect a 7% hit to S & P 500 earnings from Biden's current plan ... with Tech, Health Care, and Comm. Svcs (growth-ier sectors) hit hardest," the note said. For industrials, however, the firm said that the prospect of higher infrastructure spending and rising interest rates should provide a boost. "Renewed hopes for an infrastructure bill (considered a non-starter under gridlock) could benefit Industrials, and Industrials is one of the biggest beneficiaries of rising rates," the note said. One way for investors to gain exposure to the industrial sector is through exchange traded funds. Those include the Industrial Select Sector SPDR Fund (XLI) , which is up 12% in 3 months, and the iShares U.S. Industrials ETF (IYJ) , up nearly 13%. Overall, Bank of America's favorite sectors are value-oriented, including financials and energy, and the firm is also bullish on small caps. Smaller stocks tend to perform better relative to larger ones when Democrats control the White House and Congress, the note said.

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(This story is for CNBC Pro subscribers only).

The victories by Democrats in Georgia mean that investors should make a change to their sector allocations as the Biden administration's policies become more clear, according to Bank of America.

The firm said in a note to clients Thursday that it was cooling on the tech sector and becoming more bullish on industrials as the Democrats gain control of the Senate. NBC News projects that Rev. Raphael Warnock and Jon Ossoff have won the Senate runoffs in Georgia, giving the Democratic party narrow control of both houses of Congress.