S&P 500 Target Update: Mid-year 2026: take profits in S&P/secular growth, buy Large Value/cyclicals

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S&P 500 Target Update: Mid-year 2026: take profits in S&P/secular growth, buy Large Value/cyclicals

cked up, BofAS

credit spreads are benign, and the US is manufacturing again. What should one own nicholas.samoyedny@bofa.com

during a capex boom? Capex takers in cyclical, manufacturing sectors that throw off Trey Brown

Equity & Quant Strategist

cash, not secular growth companies that need to raise capital to compete. BofAS

harold.brown2@bofa.com

Today v. ‘22: TMT/consumer worse on quality, optionality

Capital earmarked for AI capex has constrained big Tech companies: they can’t cut capex

like in 2022/2023 without dropping out of the AI race. Buybacks are hampered by

waning cash flow, which has dramatically decoupled from strong earnings, which have

been inflated by investment income (Exhibit 29). College grads, the engine of

consumption growth since the 90s, are now facing a vacuum in demand from the threat

of AI. Meanwhile, value sectors that were starved of capital post-GFC, like Energy and

Financials, are disciplined, lean and unlevered. Cash return is best in old economy

cyclicals like Financials, Energy, Materials and worst in hyperscalers and Discretionary

(Exhibit 4). S&P refinancing risk is low vs. the Russell 2000 (70% of S&P 500 debt is

long-term fixed) but REITs and Telecom have high refinancing related earnings risk.

Good risk/reward for cyclical vs. secular/thematic growth

Investors now pay near record premia for long-term secular growth, but sales revisions

in 2026 have shifted from Software/Hyperscalers to Tech Hardware, Energy and

Materials. Long-term growth expectations haven’t been recalibrated, so the current

risk/reward in cyclical capex beneficiaries is strong. Cyclicals’ expectations are lower,