Friday, July 3

Bank of America lays out a bullish scenario where US stocks surge 14% over the next year – Business Insider

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  • Bank of America’s sell-side indicator suggests an optimistic scenario could push the S&P 500 back to February peaks within one year.
  • Though it’s not the bank’s base case, a return to 2019 fund allocation could drive $1 trillion back into stocks and help lift the index by 14%, a Thursday note said.
  • When the indicator previously flashed such a strong “buy” signal, positive 12-month returns followed 94% of the time, the bank’s analysts wrote.
  • The index’s earnings per share could even rise to new highs if GDP returns to last year’s levels in 2021, the bank said.
  • Visit Business Insider homepage for more stories.

The S&P 500 could leap by 14% over the next year if the US economic rebound hits every note right, Bank of America said on Thursday.

Though it’s not the firm’s base case, its sell-side indicator is sending a historically strong signal to buy US stocks. Cash levels in funds are at a highly bearish level, leaving plenty of fuel for a market run-up if sentiment improves.

Whether a second wave of virus cases is avoided, a reliable vaccine emerges, or consumer spending poses a sharp bounce-back, a return to 2019 market positioning could drive $1 trillion into stocks and send prices soaring, Bank of America said.

“With the Fed spending close to 40% of GDP and fiscal stimulus adding another 35% to plug the 2020 COVID-19 hole, and with multinationals re-shoring and investing in the US, we could get a big economic pickup next year,” the team led by Savita Subramanian wrote in a note to clients.

Read more: Multiple readings of the stock market’s future are near their worst levels ever. UBS explains why that’s set up a ‘significant recovery’ — and lays out a 2-part playbook to profit from it.

When the indicator previously flashed such a strong “buy” signal, positive 12-month returns followed 94% of the time, the analysts added. Should the sell-side signal prove right yet again, the benchmark index could close in on its February 19 peak of 3,393.

The optimistic scenario also sees S&P 500 earnings per share surging to a record $180 if GDP recovers to 2019 levels, the team wrote. The metric last peaked at roughly $140 per share at the end of last year, leading Bank of America’s forecast to suggest a massive jump in corporate profits arriving as soon as next year.

Arriving at a 14% rally amid the coronavirus pandemic won’t come easy, the strategists said. China’s rebound suggests consumer spending might not return to normal as quickly as hoped, and early state reopenings increase the likelihood of a second wave of infections.

Read more: RBC handpicks 8 tech stocks that could continue to grow revenues during the crisis and are built like ‘rocket ships’ for the next boom

The back-to-back economic downturns experienced by millennials could lead the demographic to hold back on spending and save more. Uncertainty about the US presidential election and future tax regimes could chip away at market sentiment, the team added.

Bank of America reiterated its preference for stocks over bonds against the current market backdrop, calling the choice “a no-brainer.” Both asset classes have enjoyed strong rallies from their March lows, but on a free-cash-flow basis, the S&P 500 is still inexpensive and stands to breach records within one year, the bank said.

Now read more markets coverage from Markets Insider and Business Insider:

JPMORGAN: These 5 stock- and bond-market risks could resurface as the government continues blockbuster stimulus efforts

The Fed’s April meeting minutes detailed a potential 2nd-wave virus scenario that could drag on the economy into 2021

A value-investing expert explains why beaten-down stocks are the most appealing since the dot-com bubble — and shares 3 stocks he bought as the coronavirus crash created ‘rare’ opportunities

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