Savita Subramanian, equity strategist at Bank of America Securities, advises investors to look beyond the broad market and focus on selective sector opportunities, particularly in healthcare and real estate.
As the U.S. stock market trades at elevated valuation levels entering 2026, Savita Subramanian, a strategist at Bank of America Securities, advises investors to look beyond the broader market and focus on selective sector opportunities, particularly in healthcare and real estate.
In a strategy report titled "A Lifeline Beyond AI," published on December 31, Subramanian noted that the S&P 500 Index appears expensive across nearly every major valuation metric, although structural differences render direct historical comparisons imperfect.
Among the 20 valuation metrics tracked by the firm, the index shows elevated levels on 18 measures, with indicators such as market capitalization-to-GDP ratio, price-to-book ratio, price-to-operating cash flow ratio, and enterprise value-to-sales ratio all nearing historical highs. Current valuations have surpassed those seen during the peak of the dot-com bubble in March 2000 for nine metrics.
Despite the index's composition reflecting higher-quality, asset-lighter, and lower-leverage companies compared to previous cycles, Subramanian stated that risks at the index level remain elevated. Bank of America has set its year-end 2026 target for the S&P 500 Index at 7,100 points, below consensus expectations.
"Bull markets always exist somewhere," the report stated, advocating that investors should focus on sector allocations rather than merely holding the index.
Healthcare and Real Estate Sectors Stand Out
Bank of America’s short-term momentum and valuation model currently ranks the healthcare sector as the most attractive industry, with the real estate sector in third place. For investors with an approximately 12-month investment horizon, the bank maintains overweight ratings on both sectors in its U.S. equity strategy.
The strategist noted that these two sectors not only appear inexpensive relative to historical market valuations but are also benefiting from upward revisions in earnings estimates and a sustained period of relative outperformance—a combination that suggests genuine value rather than mere statistical cheapness.
The technology sector ranks second in the model, but Bank of America maintains a neutral stance due to growing uncertainty about how the proliferation of artificial intelligence by 2026 will interact with broader economic dynamics.
AI and Consumers: An Increasingly Strained Relationship
Subramanian pointed out the potential conflict between the two forces that have driven$S&P 500 Index (.SPX.US)$profit growth in recent years: the rise of artificial intelligence and the resilience of American consumers.
Since the 1980s, professionals in specialized services have been the largest contributors to consumption growth. However, recent hiring trends and corporate commentary suggest that AI may reduce demand for such positions. In turn, if jobs created by AI do not materialize quickly, this could weigh on a consumer-driven economy.
The strategist noted that it remains unclear what types of new jobs this wave of AI investment will generate, prompting the bank to maintain an underweight stance on discretionary consumer goods and communication services sectors.
Passive and private capital elevate market risks
Beyond valuation concerns, the report also highlighted structural risks stemming from U.S. institutional investors' asset allocation trends. Many pension funds and asset owners have adopted a barbell strategy, simultaneously holding passive exposure to the S&P 500 index alongside private equity and private credit positions.
Passive funds currently account for the majority of the S&P 500's free float. Subramanian warned that if pressures in the private credit sector persist or interest rates fail to return to a 'long-term low' environment, some asset owners may be forced to sell their liquid equity holdings to manage portfolio valuations.
It is uncertain whether this pressure will emerge gradually or through a sharp wave of forced selling. However, the report argues that either scenario reinforces the rationale for adopting a more selective strategy toward U.S. equities in 2026.
Declining short-term appeal of staples sector
Although Bank of America remains overweight the consumer staples sector from a strategic perspective, the sector has recently underperformed in tactical models. Subramanian described consumer staples as a potential 'value trap,' noting that its recent cheapness reflects price declines rather than improved earnings expectations.
By contrast, the healthcare and real estate sectors offer attractive valuations and improving fundamentals, making them preferred areas for investors amid elevated market valuations and an evolving economic backdrop.
Editor/Melody