S&P 500 Relative Value Cheat Sheet Capex takers vs. spenders thesis played out. Raising Comm Svcs to marketweight

S&P 500 Relative Value Cheat Sheet Capex-takers vs. spenders thesis played out. Raising Comm Svcs to marketweight

o Some positive signs for equities, TMT out of “penalty box” 18 September 2026

We nudged up our year-end target to 7400 this week and launched a 12m target of Equity and Quant Strategy 7800, modest returns from here. Multiples have compressed for a good reason – higher United States earnings. But current multiples imply much lower inflation than we are likely to achieve Savita Subramanian in the near term, and we see elevated sell-off risk into year end. We are encouraged by Equity & Quant Strategist the Fed’s focus on inflation, as higher inflation/long rates are anathema to longer BofAS duration growth stocks which make up a decent chunk of the S&P 500. We here upgrade Communication Services, dominated by two hyperscalers, on better macro and micro. John Chapman Tech thesis played out: AI capex takers beat spenders Equity & Quant Strategist BofAS We see balanced risk/reward between Info Tech (market-weight) and Comm Services today as investors now worry about cuts or stalled AI capex. This is not our view, but our core thesis on Comm Svcs has largely played out – we downgraded it to uw and raised Jill Carey Hall, CFA Equity & Quant Strategist Info Tech to mw in mid-2025 on risks around increasing capital intensity, leverage and BofAS opacity of the hyperscalers v. sales growth potential in chips and hardware. Info Tech Victoria Roloff has since outperformed Comm Services, where derating on asset intensity and financial Equity & Quant Strategist BofAS leverage have pushed Comm Svcs to near-historical lows (4th percentile) in relative PE and removed crowding risks. It has moved up in our momentum/value model (Exhibit 4) Trey Brown Equity & Quant Strategist but still has a low price momentum rank given recent underperformance. BofAS Cloud sales > AI spend in 2H27, productivity surge Cloud revenue growth is forecast to outpace AI spend by 2H 2027, barring another large upward revision to AI capex in 2027. Communication Services has seen stronger improvement in productivity than either IT or the S&P 500. Long-term growth Current sector views: expectations (a contrary signal) are at all-time highs for Info Tech but are in-line with market expectations for Comm Services, suggesting less risk of disappointment. oerweight: Financials, Real Estate, Materials, Energy, Staples Debt / rate risk manageable for now market-weight: Communication Fed hikes have hurt Telecom Services more than any other sector historically, but this Services (new), Industrials, group is a small fraction of today’s Comm. Svcs sector. Leverage has increased for the two biggest companies in the sector, but is termed out longer than S&P 500’s average Healthcare, Information Technology debt and at lower interest rates due to hyperscalers’ opportunistic capital raises amid underweight: Consumer the 2025/26 window of tight credit spreads, lower rates and strong appetite for Discretionary, Utilities growth/AI. Financing needed over the next few years will increase this burden and raise capital costs, but our IG strategists see debt capital needs as manageable. Risks: supply, off balance sheet risk, transparency… Supply coming online via private company IPOs has been delayed but is another overhang from a competition perspective – our analysis of holdings changes around the SpaceX IPO provides evidence that investors sell old stuff to buy shiny new things (note). Off-balance sheet commitments for hyperscalers give us pause: financial leverage has risen gradually, but off-balance sheet future commitments have taken off. Evidence of less earnings transparency, perhaps from one-time items/investment gains is starkly evident in the divergence between free cash and earnings for Hyperscalers (see Clouds forming note).

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