MW The stock market is expensive. But there's still one bull case not priced in, says Bank of America.

By Jamie Chisholm

Bank of America says heavily regulated sectors have yet to fully rally

Stocks are hanging in there. After Thursday's Walmart wobble, broader losses were pared as investors once again bought the dip. The S&P 500 still sits just 0.4% shy of its record high.

The market's stoicism comes even as Bank of America says 19 out of 20 valuation metrics it tracks show the S&P 500 SPX "is trading at more expensive levels than historical averages."

However, the BofA team, led by equity and quant strategist Savita Subramanian, observes the Wall Street equity barometer has been statistically expensive for a while, and the premium may be warranted for a number of reasons.

For example, the index in recent years has had an increasing weighting of very profitable technology stocks, while earnings visibility has improved alongside healthier balance sheets. Corporations have successfully shifted from the era of very low cost capital to embrace greater efficiency.

And amid all the optimism, BofA says there is one bullish factor that is still yet to be priced in: deregulation.

Recent economic policy headlines out of Washington "have been dominated by tariffs - perceived to be growth-negative - but a growth-positive component of Trump 2.0 is deregulation, via cost cutting and efficiency gains," says BofA.

The industries that should have the most to gain from the cutting of red tape are those that are most tightly wrapped up in it.

But BofA notes that these groups, such as consumer sectors, large banks, commodities sectors, transports and capital goods, are trading at steep discounts to regulation-light groups, like technology, media, telecoms and the consumer & professional services sector.

"We find a strong inverse relationship between the number of regulations...and forward P/E ratios - i.e., more expensive = less regulated," says BofA.

Among the starkest contrasts in this regulation and valuation correlation is that of technology and financials, which have seen opposite fates from 2008, says BofA.

Since then tech enjoyed growth, access to capital and the lightest increase in regulations relative to all other S&P 500 sectors. Financials, on the other hand, saw the biggest increase in regulations and spent the next decade repairing balance sheets and consolidating capacity, according to BofA.

"Today the two sit at opposite ends of the valuation spectrum, but history suggests that deregulation could ignite equal and opposite reactions - a relative re-rating in financials vs a relative de-rating in tech," says BofA.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields dip. The dollar index DXY is higher, while oil prices (CL.1) slip and gold (GC00) is trading around $2,930 an ounce.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              6117.52    0.04%  -0.02%  4.01%   20.26% 
   Nasdaq Composite                                                     19,962.36  0.08%  -0.46%  3.37%   24.44% 
   10-year Treasury                                                     4.493      1.30   -4.80   -8.30   21.05 
   Gold                                                                 2944.7     1.76%  6.03%   11.57%  43.94% 
   Oil                                                                  71.88      1.86%  -3.65%  0.01%   -6.13% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

U.S. economic data due on Friday include the S&P flash services and manufacturing PMIs, due at 9:45 a.m. Eastern. The final reading of February consumer sentiment will be released at 10:00 a.m., alongside existing home sales for January.

Some $2.7 trillion worth of option contracts are set to expire on Friday, according to Goldman Sachs.

Shares of Nissan (JP:7201) jumped nearly 10% after the Financial Times reported "a high-level Japanese group" were drawing up plans to ask Elon Musk's Tesla $(TSLA)$ to invest in the struggling car maker. How the companies could fit together.

Celsius Holdings $(CELH)$ shares are topping the leaderboard in premarket action, leaping 35% after the drink maker posted better-than-expected earnings and announced the $1.8 billion purchase of rival Alani Nu.

Block shares $(XYZ)$ skidded 7% as the payments company's results were not well received by investors.

Fed Vice Chairman Philip Jefferson is due to speak at 11:30 a.m. and San Francisco Fed President Mary Daly makes opening remarks at the same time.

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The chart

There's been a lot of talk of late about the recent outperformance of markets like Germany in relation to the U.S. The chart below from Nicholas Colas, co-founder of DataTrek Research, which depicts the correlation between the S&P 500 and the MSCI EAFE index (non-US developed economies like Europe and Japan), shows just how extreme things have gotten.

"We've seen this sort of anomalous price action in numerous other asset classes and even single stocks over the years, and it always ends with a short-term correction in asset prices that force correlations back to their long run average. In the case of EAFE versus U.S. large caps, we believe that non-U.S. stocks are more likely to weaken from here just given their recent outperformance," says Colas.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Tickers  Security name 
   NVDA     Nvidia 
   TSLA     Tesla 
   PLTR     Palantir technologies 
   GME      GameStop 
   BABA     Alibaba 
   SMCI     Super Micro Computer 
   HOLO     MicroCloud Hologram 
   MLGO     MicroAlgo 
   TSM      Taiwan Semiconductor Manufacturing 
   NIO      NIO 

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-Jamie Chisholm

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February 21, 2025 06:34 ET (11:34 GMT)

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