Three trades that will make investors pay the most, per BofA

With the second half of the year underway, there are three trades that investors should make sure they’re on the right side of, Bank of America says. “Pain trades” are considered to be moves in the market that go against the position of a majority of traders, therefore inflicting a great deal of harm on them. Heading into year’s end, Bank of America’s pain trades pertain to the recent reversal in mega-cap technology stocks as well as the hazards of neglecting cyclicals and dividends. Big Tech continues pulling back The first pain trade Bank of America thinks investors should watch out for is the reversal in Big Tech, which soared in the first half of the year. From January to June, CNBC’s Magnificent 7 index gained more than 36%. Artificial intelligence darling Nvidia and the other “Magnificent Seven” stocks have been instrumental in lifting the S & P 500 to its nearly 16% year-to-date advance. In July, however, hopes for potential easing in monetary policy from the Federal Reserve led to a rotation out of those mega-cap tech stocks and into small caps . The Russell 2000 index surged 10% during the month, while the Nasdaq Composite ended July lower by about 0.8%. Bank of America expects earnings of the remaining 493 S & P 500 companies to accelerate into the end of the year. That signals that the rotation out of tech “may have further to go,” inflicting pain on those still banking on the same tech stocks, the bank said. The firm thinks this is especially the case if AI monetization dwindles. “We expect AI to transition from a ‘tell me’ to a ‘show me’ story, with any disconnect between investments and revenue generation to come under increased scrutiny,” analyst Savita Subramanian wrote in a Wednesday note. “Overweight capex growers that fail to monetize quickly enough could be vulnerable to de-risking.” Cyclical stocks rally Another pain trade lies in the danger of investors neglecting cyclical exposure, as the firm thinks softening economic data is “not nearly enough” to justify an “extreme” lack of exposure in long-only funds. Notably, Bank of America sees opportunity for increased exposure in energy and materials, given funds’ decreasing exposure to those sectors compared to the S & P 500 in the first half of the year. The firm also thinks bank stocks are overlooked. In 2024, energy, materials and financials have all rallied, gaining more than 11%, 7% and 16%, respectively. “In a soft landing scenario with slowing inflation and rate pressure expected to ease, we see a supportive backdrop for cyclicals,” Subramanian said. Dividend stocks rising Investors can also overlook dividend plays at their peril. Bank of America identified avoiding dividend-paying stocks as another pain trade for later this year. To that end, the firm sees more opportunities in stocks for investors searching for yield compared to bond funds despite the fact that those funds have seen record inflows in 2024, according to data from research firm EPFR. Bank of America also notes that more than 200 S & P stocks currently provide higher real return potential than the 2% offered by the 10-year Treasury . Real return is a measurement of what investors earn after taxes and inflation. Of those stocks, 75% are considered underweight in long-only funds, the firm found. “Overall, we expect dividends to make up a larger proportion of returns than the outsized price returns and multiple expansion of the past decade,” Subramanian said. The SPDR Portfolio S & P 500 High Dividend ETF (SPYD) has surged 10% year to date and more than 7% in the past month.