Bank of America unveils its top stock pick in each of the 11 S&P 500 sectors and explains why they’re poised to dominate in the year ahead

  • Value over growth, small-cap over large-cap, cyclicals over defensives, and a focus on ESG investing are among the central themes in Bank of America's 2021 market outlook. 
  • The bank's US equity and quantitative strategy team also shared its top stock pick from each of the 11 S&P 500 sectors that aligns with such themes. 
  • The team has set a target of 3,800 for the S&P 500 index by the end of 2021, which signals a 2% gain from Friday's closing level.
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2020, the year of a lethal virus, economic shutdown, massive unemployment, and wild markets, is drawing to a close. 

"2020 was an unprecedented year in many ways," said Savita Subramanian, Bank of America's head of US equity and quantitative strategy, in a 2021 outlook video. 

She continued: "Investors need to determine whether the many dramatic changes that occurred this year across working, spending, politics and geopolitics, supply chain dislocations, and so many other factors, will these changes stick or will they revert?"

The answer is a little bit of both, according to Subramanian, who spells out in an outlook report what investors should watch in the year ahead. 

"First, watch for the advent of inflation or hyperinflation or even stagflation," she said. "Rampant money printing by central banks amid a quick sharp recession, followed by a demand spike on a reopening of the economy could conspire to create tremendous short-term inflationary pressures despite the longer-term secular depressants like technological disruption, global aging demographics, and the like."

She also advises investors to stick with the theme of ESG investing.

"It's likely to gain rather than lose steam in 2021. Supply chain shocks from COVID-19 have actually created values-based ecosystems of global partners with similar basic ESG approaches," she said. "And for investors, the learning curve of ESG has advanced. ESG is not just about buying asset-light companies with great disclosure and low direct carbon emissions."

Finally, she is bullish about the continued rotation into value stocks

"We are unabashedly in favor of value over growth for a growing list of reasons. We like small-caps over large-cap and cyclical sectors over defensive," she said. "Our sector overweights include energy, technology, and financials, plus the surprisingly inexpensive and under-owned healthcare sector. We are underweight bond proxies and crowded secular growth via consumer staples, real estate, and communications services."

Overall, Subramanian and her team have set a year-end target of 3,800 for the S&P 500 in 2021. That would be a 2% gain from Friday's closing level compared to Goldman Sachs' more bullish prediction which indicates the S&P has 16% upside and would end at 4,300.

"A lot of optimism is already priced into the S&P 500 on a vaccine and an economic recovery," she said. "And we think the near-term risks are skewed to the downside."

But when it comes to the choice between stocks and bonds, Subramanian said it's a no-brainer. Her team's long-term valuation model suggests that stocks will generate an expected return of five-to-six percentage points per annum over the next 10 years. 

They also shared 11 top stock ideas for 2021 — one each from the 11 S&P 500 sectors — that align with the central themes mentioned above. 

The stocks, which are also buy-rated by Bank of America analysts, are listed below along with their tickers, sectors, market cap, and commentaries. 

1. Walt Disney

Ticker: DIS

Sector: Communication services

Market cap: $313.10 billion

Commentary: Reopening exposure (parks/cruise); Screens well on Alpha Surprise and BofA vs. consensus; Neglected (0.45x); no NDR; high employee satisfaction.

Source: Bank of America

2. Hilton Worldwide

Ticker: HLT

Sector: Consumer discretionary 

Market cap: $28.94 billion 

Commentary: Reopening stock; easy comps; High employee satisfaction, top 50 BofA-covered companies by overall ESG score; domestic; Cheap on FCF yield, but expensive on fwd P/E

Source: Bank of America

3. Walmart

Ticker: WMT

Sector: Consumer staples

Market cap: $411.03 billion

Commentary: Defensive hedge, high quality; Value; domestic; Underweight (0.3x); Focused on digitization; Risk: recession stock

Source: Bank of America

4. Chevron

Ticker: CVX

Sector: Energy

Market cap: $170.55 billion 

Commentary: Value, biggest beneficiary of a value rotation among the Energy companies; Ranks well on BofA vs. consensus EPS; stable FCF (positive even in 2020 vs. -$3B for XOM);
Underweight (0.4x)

Source: Bank of America

5. Allstate

Ticker: ALL

Sector: Financials

Market cap: $32.32 billion

Commentary: High quality value; Neglected (0.41x); Ranks well on Alpha Surprise, BofA vs. consensus and DDM alpha; High ESG score

Source: Bank of America

6. HCA Healthcare

Ticker: HCA

Sector: Health care 

Market cap: $54.61 billion 

Commentary: High quality value, domestic; Above market LTG; ranks well on Alpha Surprise & BofA vs cons.; Risk: expensive on FCF, slightly overweight by long-only funds (1.1x)

Source: Bank of America

7. Alaska Air

Ticker: ALK

Sector: Industrials

Market cap: $6.15 billion 

Commentary: Value, reopening beneficiary; easy comps; domestic; neglected; High employee satisfaction; stocks to benefit from a more nuanced look at "green"

Source: Bank of America

8. Qorvo

Ticker: QRVO

Sector: Information technology 

Market cap: $18.12 billion

Commentary: GARP; neglected (0.5x); secular growth (5G and IoT); Screens: beneficiaries of a potential end of tit-for-tat tariffs, capex beneficiary, stocks helped by rising rates; Risk: tough comps; Huawei exposure

Source: Bank of America

9. Vale

Ticker: VALE

Sector: Materials

Market cap: $5.13 billion 

Commentary: Iron ore exposure (more upside per commodity strategists); Pro-inflation and weaker USD beneficiary; Value; ESG turnaround story

Source: Bank of America

10. Realty Income

Ticker: O

Sector: Real estate

Market cap: $21.51 billion 

Commentary: High quality, non-discretionary tenants; stabilizing distributions with growth in 2021; Neglected; domestic, ranks well on BofA vs. consensus

Source: Bank of America

11. NextEra Energy

Ticker: NEE

Sector: Utilities

Market cap: $145.68 billion 

Commentary: Benefits from a shift to renewable/alternative energy; High ESG score, neglected; top decile rank on Alpha Surprise, BofA vs. consensus, and DDM alpha

Source: Bank of America

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