As concerns persist about a possible Fed rate hike and an economic slowdown, some investors fear a slide in stocks as 2023 draws to a close.
However, Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, offers a reassuring message to investors, drawing inspiration from a reggae legend: “Don’t worry, be happy,” Subramanian emphasized in a note to a client.
Bank of America has revised its year-end target for the S&P 500, raising it from 4,300 to 4,600. This adjustment suggests a potential upside of 3% from current S&P 500 levels.
“‘Recession was averted,’ according to the consensus of economists, but there is a resurgence of bearish narratives around stocks,” Subramanian said. “The combined signal from our five target indicators is optimistic, resulting in a new year-end target of 4,600 for 2023, up from 4,300.”
Bank of America’s economic research team no longer forecasts a recession for the U.S. economy. Subramanian concludes that markets are already in the “recovery phase.” The equity strategy team believes the profit declines seen in second-quarter earnings represent the low point, which could lead to a boost in stocks, as corporate earnings often drive stock performance.
According to Subramanian, BofA’s “strongest conviction” remains that the equal-weighted S&P 500, which is not adjusted for company size, will outperform the standard S&P 500 index. Over the past nine recovery cycles, the equal-weighted index has consistently outperformed the regular index. Additionally, Subramanian’s team believes that any threat of deglobalization, such as China reducing its consumption of Apple, would affect mega-cap tech stocks more significantly than mid-cap stocks.
With just five companies representing a quarter of the S&P 500 index, Subramanian notes that the index is “higher than ever.” He maintains there is potential in other companies that haven’t seen the same surge amid the artificial intelligence boom.
“Inefficient and old-economy (companies) (most common in the equally weighted S&P 500) could benefit as much as technology and growth, but they have not priced this issue as well,” Subramanian wrote.
Contrary to bearish sentiments, discontent towards stocks could be positive
Bank of America’s year-end target of 4,600 for the S&P 500 is among the highest among Wall Street strategists tracked by Yahoo Finance. This, according to BofA research, is an encouraging sign.
Based on data going back to 1999, BofA found that the S&P 500’s average year-end target at the end of August typically anticipates gains of 5% by the end of the year. In the rare cases where strategists predict a decline in the benchmark index from its August close, the S&P 500 actually performs better than expected.
Historically, when the consensus forecast anticipates a decline in the index over the last four months of the year, the S&P 500 has consistently risen, generating superior average returns compared to forecasts predicting gains for the S&P 500.
So, if this year’s consensus projection of a 2% decline in the S&P 500 by the end of 2023 is any indication, the stock may have more room to grow.
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