Crowded trades! Bank of America warns: "Buy AI, sell consumer" is getting harder to generate excess returns.

Bank of America Securities' latest "Active Manager Position Update" report points out that active fund positioning has fully reflected the "consumption to capital expenditure" theme, and generating excess returns by buying AI capex beneficiaries and selling white-collar consumption theme stocks is becoming increasingly difficult, with a recommendation to selectively rotate. Selling consumption, buying AI capex: excess returns no longer easy The report, based on an analysis of long-only (LO) active fund industry exposure versus history, argues that current positioning has fully reflected the "consumption to capital expenditure" theme. Industrials relative to consumer discretionary positioning is near historical highs; IT services, consumer finance, and software the "AI disruption victims" are near historical lows; staples relative to discretionary, and tobacco relative to luxury, have seen weights surge. Bank of America says that given the current portfolio structure, generating excess returns by buying capex beneficiaries and selling white-collar consumption theme stocks may be more difficult. The bank warns that US consumer demand should not be underestimated, and capex strength may already be largely priced in by the market, thus recommending a selective rotation. TMT: Overall neutral, positioning clearly divergent Apple Inc. (AAPL.US) and Microsoft Corporation (MSFT.US) remain "stable core holdings," held by more than 80% of funds, but are slightly underweight due to their large benchmark weights; other tech stocks have seen positions jump significantly since 2015. Bank of America holds a neutral view on TMT (tech/media/telecom) overall, believing that risk and reward for large-cap TMT stocks are now more reasonably reflected in prices. Active funds: non-S&P 500 exposure near historical lows After the S&P 500 index easily outperformed most global equity indices for consecutive years, active managers' holdings outside the S&P 500 have approached historical lows. Non-S&P 500 exposure is about 15%, having fallen to as low as 14% in 2024, versus 20% in 2020. Cash levels have remained low since 2024, while ADR (American Depositary Receipt) holdings have remained nearly unchanged over the past few years at about 2%. Healthcare: back on fund managers' radar Whether due to AI fatigue or the market having been over-exploited, Bank of America says that recently more and more clients are asking about growth stocks unrelated to AI. Healthcare companies are re-entering fund managers' radar due to their idiosyncratic nature, standout performance on screening metrics, and benefiting from demographic demand as well as AI adoption. However, policy risk is a key constraint, especially ahead of the US midterm elections. Encouragingly, compared with previous negative policy shocks (such as Hillary Clinton's 2015 tweet and Sanders' 2019 "Medicare for All" proposal), the sector's current crowding is lower, with about 10% of funds overweight, versus nearly 20% during the previous two periods. Tax-loss selling: selling pressure has not dissipated Bank of America typically publishes its tax-loss selling screening list around October, as October is the peak for institutional selling. However, because clients have requested it earlier and earlier, the bank already released it ahead of schedule in last month's "Position Report." The screening targets S&P 500 constituent companies that have fallen at least 10% year-to-date and are widely overweight. These stocks have since fallen another roughly 6 percentage points. However, Bank of America believes selling pressure may not be over yet: on one hand, institutional investors did not sell heavily last month; on the other hand, the strategy's returns are typically worst in October. Historical experience shows that if you sell now, you buy back as early as November. It is understood that so-called tax-loss selling refers to investors selling losing securities, converting unrealized losses into realized capital losses, which can be used to offset capital gains from other investments, thereby reducing tax liability. In markets that levy capital gains taxes, such as the United States, this is a common legal tax strategy. Individual stocks polarized: most crowded and most neglected The Bank of America report also lists the "most crowded" and "most neglected" S&P 500 stocks by industry among long-only funds. The most crowded stocks include: Meta (META.US), Starbucks Corporation (SBUX.US), Philip Morris International Inc. (PM.US), ConocoPhillips (COP.US), Charles Schwab Corp (SCHW.US), Vertex (VRTX.US), Boeing Company (BA.US), Broadcom Inc. (AVGO.US), Corteva (CTVA.US), Welltower (WELL.US), Constellation Energy (CEG.US). The most neglected stocks include: News Corporation Class B (NWS.US), Hasbro, Inc. (HAS.US), Hormel Foods Corporation (HRL.US), Texas Pacific Land (TPL.US), Erie Indemnity Company Class A (ERIE.US), Henry Schein (HSIC.US), Generac (GNRC.US), Trimble Inc. (TRMB.US), Amcor (AMCR.US), Kimco (KIM.US), Eversource Energy (ES.US).