Bank Of America Says Cash Is A 'Compelling Alternative' To Stocks

As turbulence in the financial sector clouds the direction the Federal Reserve is taking and worsens the economic outlook, sticking to the mantra "cash is king" might be a winning strategy for investors this year.

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Interestingly, analysts from Bank of America Corp. led by Savita Subramanian, wrote a note to clients Wednesday stating that cash is a "compelling alternative" to the S&P 500 index in the near term. A firm based in New York believes the US equity benchmark has a limited upside within the next few years against its year-end target of 4,000 - roughly where it is currently trading at - while cash offers a return of around 5%.

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During the month of May, markets have been plagued by fears that a possible financial crisis may occur, following the recent failures of some regional US banks, and the near collapse of credit Suisse Group AG, the world's largest bank, before it was taken over by a rival, a Swiss company, under government sponsorship. 

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In the wake of fears of contagion risks recently, bets against recent rate increases by the Fed and other central banks have increased as a result of the possibility that the cycle of rate hikes could be at its end.

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According to traders' expectations for the outcomes of the US monetary policy meeting in May, the chances of another quarter-point rate increase are one-in-two, while the odds of one-in-two rate reductions by the end of the year are about 75 basis points.

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Global cash funds reported their largest weekly inflow since March 2020 as concerns over the global economic outlook continue to mount, as per data released by EPFR Global last week, which is cited by the bank.

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In a valuation model based on BofA's models, the S&P 500 is projected to return 7% annually over the next decade, while cash appears more attractive for near-term positioning.

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According to Subramanian's team, the S&P 500 may not have much need to pay attention to valuations in the near term, but over the long run they may only need to pay attention to value if this is the case, he says.

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In the last decade, Bofa noted, market participants have shifted their focus away from the long term and have significantly shifted their attention to the short term, with zero-day-to-expiry options now accounting for nearly half of the total volume of options in the S&P 500, up from less than 5% a decade ago.