Cash Is a ‘Compelling Alternative’ to Stocks, Bank of America Says

(Bloomberg) -- Sticking with the mantra “cash is king” may be a winning strategy for investors this year as turbulence in the financial sector obscures the Federal Reserve’s path and worsens the economic outlook.

In the near term, cash is a “compelling alternative to the S&P 500 index,” strategists at Bank of America Corp. led by Savita Subramanian said Wednesday in a note to clients. The firm sees limited near-term upside for the US equity benchmark against its year-end target of 4,000 — roughly where the gauge is currently trading at — while cash offers returns of around 5%.

Markets have weathered a volatile month plagued by fears of a potential crisis in the financial system following the recent failure of some US regional lenders and the near-collapse of banking giant Credit Suisse Group AG before its government-brokered takeover by rival UBS Group AG. 

The prospect of contagion risks raised bets that recent rate increases by the Fed and other central banks could be the last of the current hiking cycle before a pause.

Trader expectations for US monetary policy currently assign one-in-two odds of another quarter-point rate increase at the May policy gathering, while pricing in about 75 basis points of rate cuts by the end of the year.

As concerns over the economic outlook mount, global cash funds had their biggest weekly inflow since March 2020, the bank said last week, citing EPFR Global data.

While cash looks more attractive for near-term positioning, BofA projects a 7% total annual return for the S&P 500 over the next decade based on the firm’s valuation modeling.

“Valuations may not explain much in the near term, but they may be all that matters over the long-term for the S&P 500, based on our work,” Subramanian’s team said.

Investors’ attention has shifted to the short term meaningfully in recent years, Bofa noted, with zero-day-to-expiration options now comprising nearly half of total options volume in the S&P 500 compared to less than 5% a decade ago.

--With assistance from Farah Elbahrawy.

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