Investing.com -- Bank of America said in a note Monday that clients should favour energy, consumer staples, and large-cap value stocks over the broader S&P 500, arguing that key risks are not fully reflected in the benchmark’s valuation.

Equity and quant strategist Savita Subramanian wrote that investors should “buy Energy/Staples/LCV, not the index.”

According to Bank of America, the relationship between the S&P 500 and crude oil prices suggests the market remains stretched.

Subramanian said a simple ratio analysis shows the index “is still trading higher, in WTI terms, than any other point in history … except COVID” and the 2000 tech bubble.

On taxes, BofA argued that stronger receipts are already priced in, supporting some discretionary names, but warned that a “higher bill for short term equity gains” is not.

Subramanian recommended selling discretionary stocks.

Consumer staples, by contrast, appear better positioned, and while lower demand from net migration is reflected in valuations, Subramanian said tighter labour markets could buoy wages and support spending, noting that this backdrop encourages a “trade up in food, personal products and other goods.”

The bank also highlighted cash dynamics, saying retirees’ money-market holdings are unlikely to support technology dips, while institutional cash balances are at five-year lows.

Subramanian wrote that a rotation within the index “necessitates selling existing holdings,” reinforcing the case for large-cap value.