Despite US debt ceiling talks going to the wire, Wall Street is not short of optimism. Find out where this leading bank thinks the S&P 500 could end the year.
A “glass half full” view of US equities has driven Bank of America strategists to upgrade their S&P 500 index year-end target to a level last seen in August.
Their more optimistic stance of 4,300 is up from 4,000 previously and compares with the benchmark’s level of 4,192 after a 10% year-to-date rise before today’s opening bell.
The forecast framework used by the Bank of America for its new S&P 500 target incorporates five signals spanning fair value, sentiment/positioning, central bank impact, long-term valuation and price momentum. They ranged from 3,900 for fair value to 4,600 for sentiment.
Last week the S&P 500 rose 1.6% in its best performance since March, with Bank of America reporting that clients were net buyers of US equities after the biggest inflows since October.
The S&P 500 today traded slightly lower, reflecting some reluctance by investors to commit to new positions while there’s the risk of a US debt default as soon as 1 June.
Negotiations between President Joe Biden and House Speaker Kevin McCarthy resumed on Monday, with both calling talks as “productive” and hinting an agreement could be near.
A last-minute deal remains the base case, but investors have been warned they should brace for potential volatility in the lead-up to an eventual compromise.
Alongside the debt ceiling, Bank of America said it was not hard to build a bear case for the S&P 500 based on a range of factors including geopolitics, the threat of recession or a Federal Reserve mis-step on monetary policy.
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However, the bull case notes that the end of the era of cheap money may be good for markets.
The bank said: “Over the past few decades we have enjoyed financially engineered growth: cheap financing, buybacks and cost cutting.
“Today, Corporate America has shifted focus to structural benefits - efficiency/automation/AI have bought them time to adapt via long-dated fixed rate debt.
“Old economy cyclicals, capital-starved since 2008, have become disciplined and self-sufficient, evidenced by lower betas and more stable earnings.”
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Current valuations are not low, but cyclically adjusted earnings argue for price returns of 5% per year for the S&P 500 over the next decade - better than the negative returns yield by valuation seen at the beginning of last year.
The bank added: “As equities grow less extended, bonds look riskier, and we see more risks in bonds, public debt and the so-called risk-free rate.”
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