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Bank of America: No Recession in Sight, Markets in Recovery

Amidst mounting concerns over a potential Fed rate hike and signs of a consumer slowdown, skeptics of the stock market’s resilience find ample ammunition as 2023 nears its end. However, the Head of US Equity & Quantitative Strategy at Bank of America, Savita Subramanian, counters these apprehensions with a reassuring message, drawing inspiration from a reggae music legend: “Don’t worry, be happy,” Subramanian conveyed in a recent client note released on Wednesday.


In a notable shift, Bank of America has revised its year-end target for the S&P 500 from 4,300 to a more optimistic 4,600, signifying a potential 3% upside from the current S&P 500 levels.


“The consensus economist asserts ‘recession averted,’ yet a fresh wave of bearish sentiments surrounding equities has surfaced,” Subramanian noted. “The collective signal from our five target indicators remains bullish, yielding a new year-end target for 2023 at 4,600, up from the previous projection of 4,300.”


The Bank of America Research economics team no longer foresees a recession looming over the US economy. Subramanian asserts that markets are already in the “recovery phase.” Additionally, the equity strategy team posits that the profit declines observed in second-quarter earnings represent the trough, implying a potential upswing for stocks, given the historical correlation between corporate profits and stock performance.


Subramanian’s note underscores Bank of America’s “highest conviction call” in favor of the equal-weighted S&P 500, which refrains from adjusting the index based on company size, a strategy which has outperformed the standard S&P 500 index in the last nine recovery cycles. Furthermore, Subramanian’s team contends that any threats of deglobalization, such as reduced Apple consumption by China, would exert greater pressure on megacap tech stocks as opposed to midcap stocks.


Highlighting a concerning trend, Subramanian points out that five companies now account for a quarter of the S&P 500 index, rendering it “more top-heavy than ever.” She suggests that potential lies in companies that have not experienced a surge amid the artificial intelligence boom.


“Established, less efficient companies, which are more prevalent in the equal-weighted S&P 500, could stand to benefit as much as tech and growth sectors, yet they have not factored this theme in as significantly,” Subramanian emphasized.


Bank of America’s year-end call of 4,600 for the S&P 500 stands as one of the most optimistic among Wall Street strategists tracked by Yahoo Finance, a positive indicator according to Bank of America’s research.


Drawing on data spanning back to 1999, Bank of America discovered that the average S&P 500 year-end target in late August typically anticipates 5% gains through year-end. In rare instances when analysts predicted a decline from the August close, the S&P 500 performed notably better than anticipated.


Historically, when the consensus forecast predicted a drop in the index during the last four months of the year, the S&P 500 defied expectations, yielding better average returns compared to forecasts anticipating gains.


In light of this year’s consensus forecast projecting a 2% decline in the S&P 500 by the close of 2023, stocks may have room to ascend further.

Source: Yahoo Finance

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