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BofA Securities raises its year-end target for the broader market based on the five measures it uses to measure stocks.
You now expect the S&P 500 (SP500) (New York: The Spy) will expire (IVV) (VOO) at 4,300, up from 4,000. That’s just over 100 points from where the index is currently.
“In our forecasting framework, we integrate five signals: (1) fair value, (2) sentiment/positioning, (3) central bank influence, (4) long-term valuation and (5) price momentum,” Savita Strategist Subramanian and his team wrote in a note. For (1), we shifted the cost of equity assumptions to incorporate a higher 2% real interest rate (residual period average back to the 1950s) and a lower equity risk premium consistent with higher quality components, and offsetting inflationary pressures. in part by productivity gains and pricing power.”
“For (1) and (4) we update normal earnings to use a longer revision period for the logarithmic trendline earnings (1936 – now vs. 1977 – now),” said Subramanian. “So we avoid compounding in a downward rate environment and incorporate that the standard is longer duration but also higher quality.”
She noted that among the bearish signs were geopolitics, “the Fed’s error, the debt ceiling, the second financial crisis, recession, ‘disposal of the affluent’, credit, stagflation, urban collapse, civil unrest, price slopes, and jobs.” “Allocations to stocks versus bonds have fallen to their lowest levels in 2009 (SSI). Bad news is in the ether and is priced in cyclically.”
“The S&P 500 of 4,300 is not far from today’s levels,” Subramanian said. “We see continued downgrade risks for large-growth stocks, and correct sizing and managing duration risk keeps our outlook constrained.”
“We prefer the even-weighted, benchmark-weighted S&P 500 (RSP) over the cap-weighted S&P 500 where, using the same tools, returns are twice those of the cap-weighted S&P 500.”
