A 5-10% pullback in S&P 500 'entirely possible' says BofA's Subramanian

Bank of America's research team said that the increased election uncertainty could definitely contribute to a market pullback over the next few months.

Along these lines, the bank anticipates increased market volatility and acknowledges the possibility of a "5-10%" pullback in U.S. equities.

However, Savita Subramanian, the Head of U.S. Equity Strategy and U.S. Quantitative Strategy at Bank of America, argues that the impact of politics on markets may be overestimated by investors.

Answering a question from Investing.com during the bank's media roundtable, Subramanian pointed out that certain sectors could face pressure due to the potential change in the White House leadership. She also expects a spike up in VIX during the election campaign.

Healthcare, for instance, is seen as vulnerable from both political sides given its exposure to government contracts, while the green energy is likely to be affected in case Republicans take over.

Moreover, the technology sector could face additional regulatory risks if Democrats stay in charge, while smaller regional banks are also at risk due to higher regulatory scrutiny.

Despite these concerns, Bank of America maintains a positive outlook on the U.S. economy, which, although cooling, is still perceived as strong. 

Unlike some of its peers, the bank has chosen not to alter its S&P 500 price target at this stage. Instead, Subramanian would like to get over the election uncertainty and then review its S&P 500 price target, especially if the mega-cap strength persists. 

During the presentation, Bank of America said that current positioning favors anti-cyclical, pro-growth, and pro-tech investments. Hence, there is plenty of room for ongoing sector rotation to continue.

The bank also highlighted that not all technology stocks are overvalued, with some of the 'Magnificent 7' companies being considered as value stocks due to their ability to return capital while at the same time they continue to grow.

Finally, the banking giant expects that income investors are likely to become the next significant buyers of stocks.