High valuation enterprises are nothing to worry about! Bank of America Merrill Lynch: Strong corporate fundamentals are expected to support US stocks.

Despite the fact that the valuation of the S&P 500 index is currently at its highest level in decades, Bank of America Corp has stated that corporate fundamentals are stronger than they have been in many years, which may help support the stock market performance even with high valuations. Savita Subramanian, Head of US Equity and Quantitative Strategy at Bank of America, stated that compared to historical average levels, 19 out of 20 valuation indicators for the S&P 500 index are showing as "statistically expensive", making it difficult to build a strong bullish case for the index based solely on valuation. However, Subramanian also pointed out that earnings expectations have turned positive and the long-term recovery of US capital spending is expected to support nominal growth and drive corporate profits. She noted that the question is whether the shift to asset-intensive business models will erode the index's profit margins and price-earnings ratios. Despite facing higher interest rates, inflation, and policy volatility, the profit margins of the S&P 500 index have performed better than expected, thanks to companies gradually moving away from a "low-quality" growth model reliant on zero interest rates and globalization. The leverage ratios of most industries are still close to historical lows, and as the technology and healthcare sectors increase in weight, the index has become more "asset-light" in recent decades. Subramanian warned that a new emerging risk is that several of the largest companies, including the "Big Six" excluding Tesla, Inc. (TSLA.US), are becoming more asset-intensive as they invest billions of dollars in capital expenditures. Bank of America Corp's historical analysis shows that asset-intensive manufacturers typically have lower valuation multiples than innovation-driven companies reliant on research and development, as the former have higher fixed costs and slower growth prospects. She stated that if the current massive artificial intelligence investment cycle can bring about transformative productivity gains, it may ultimately offset these concerns. Wages inflation post-pandemic has already prompted companies to "do more with fewer people," with less labor-intensive companies continuing to outperform their less efficient counterparts. Furthermore, Bank of America Corp remains bullish on the financial and other "traditional economy" sectors, citing potential regulatory relaxation as a catalyst for further productivity enhancement.