The U.S. stock market already showed solid gains in 2023, with the S&P 500 climbing 13%. While momentum seems to have slowed as stocks pulled back recently, Bank of America believes there's more upside on the horizon.
On Sept. 20, the bank raised its year-end price target on the S&P 500 from 4,300 to 4,600. Considering that the benchmark index currently sits at 4,320, the new target implies a potential upside of 6.5%.
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According to Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Global Research, productivity is one of the reasons behind the optimistic outlook.
"AI (artificial intelligence) is part of this, as are automation, right-sizing labor and wage inflation incentives after a decade of easy, financially engineered earnings growth. Productivity would likely drive the equity risk premium (ERP) lower," she wrote in a research note.
And it's not just tech stocks that stand to capitalize on this trend. Subramanian noted that "old economy" companies could benefit as much as tech and growth, but this theme has not been priced in "as richly."
Sentiment is another reason the market could have another leg up.
"Sentiment is more bearish than bullish, our Sell-Side Indicator implies +15% over the next 12 months," Subramanian said.
Still, if you want to capitalize on the projected upside in the benchmark index, you might want to consider a different strategy than simply buying the first S&P 500 exchange-traded fund (ETF) you see.
How To ‘Handily Outperform' The Benchmark
The standard S&P 500 Index is market cap weighted, so larger companies with higher market capitalizations have a greater impact on the index's performance.
But there's also an equal-weighted S&P 500, which gives each company in the index an equal weight. This means the performance of each company has the same influence on the overall index value.
According to Subramanian, the equal-weight index has an edge in the current situation.
"The less expensive equal-weighted S&P 500 should handily outperform its cap-weighted counterpart, and value sectors like financials and energy should outperform from here," she said.
Investors have long been using ETFs to gain exposure to popular stock market indices. For instance, the market-cap-weighted SPDR S&P 500 ETF Trust SPY is the largest ETF in the world as measured by assets under management.
The good news? You can use ETFs to access equal-weighted indices, too.
For instance, if you want to track the equal-weighted S&P 500, you can look into the Invesco S&P 500 Equal Weight ETF RSP. RSP is based on the S&P 500 Equal Weight Index and invests at least 90% of its total assets in securities that comprise the index. Both the fund and the index are rebalanced quarterly.
RSP has a total expense ratio of 0.2%.
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