Interactive Investor

Here's where a 'glass half full' Wall Street sees S&P 500 at year-end

23rd May 2023 15:21

by Graeme Evans from interactive investor

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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.

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      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.

      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.”

      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.”

      These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

      Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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