Here's the 2023 playbook stock market investors should follow as they sit on a $2 trillion cash pile, according to Bank of America

• Investors are sitting on a $2 trillion cash pile, but they should wait before investing it in stocks.
• Bank of America said "timing is everything" and investors will see stock buying opportunities in early 2023.
• "History reveals superlative returns after the last Fed hike," Bank of America said.

Investors have built up a $1.9 trillion cash pile since the COVID pandemic, but they should hold off buying stocks until the Federal Reserve's last rate hike, which is expected in the first quarter of 2023, Bank of America said in a Wednesday note.

"Timing is everything," BofA's Research Investment Committee said, adding that Fed rate hikes and equity outflows should offer investors better entry points into the stock market early next year.

"Once rate hikes bite labor markets, the Fed will pause, and investors should deploy the $1.9 trillion... History reveals superlative returns after the last Fed hike," BofA said, highlighting that the S&P 500 has delivered average returns of 14% in the 12 months following the Fed's final increase in a tightening cycle.

The Fed is expected to lift interest rates by 50 basis points next week, and then another 25 basis points at its February FOMC meeting, according to the CME's FedWatch Tool.

In terms of what to buy in early 2023, BofA said investors should focus on owning companies that have resilient earnings, especially considering that many expect an economic recession to materialize next year.

"High free cash flow stocks outperformed the market by 7 percentage points per year since 1991, and during major economic downturns, companies with steady profits outperformed by 10 percentage points," BofA said.

But it's still not quite the time to buy, according to the bank. One signal the firm is watching to determine if a buying opportunity is near is equity flows, and more specifically, outflows from equity funds and ETFs, which have been mysteriously absent so far this year.

"The absence of substantial equity outflows is historically unusual and kept our asset allocation cautious this year," BofA said. "Active US household investors, the $40 trillion whale in equity markets, never sold aggressively enough in 2022 to reverse the $4.2 trillion equity inflows since COVID."

BofA expects new market leadership in 2023 as 5% inflation levels become the new normal, compared to prior years of just 2%. At that elevated level, the bank expects equal-weighted stock market indices to perform better than market-cap-weighted indices, which essentially means smaller companies will outperform larger companies.

To that effect, the bank believes small-cap value stocks should finally have their day in the sun after years of substantially underperforming large-cap growth stocks.

"We resist buying the dip in beaten down growth stocks. $100 of small cap value in 1926 is worth $36 million today vs $0.8 million for large cap growth," BofA said.