Shortly after Bank of America got steamrolled by the market, which as we noted earlier has had its best start to a year in history for global stocks, and made a mockery of the bank’s year-end price target of 2,800, moments ago the bank’s chief equity strategist Savita Subramanian raised the bank’s year-end S&P price target to a more comfortable 3,000, as a result of “improving but not yet extreme sentiment” and a “likely bigger-than-expected boost to earnings from the tax reform.”
From the note:
We here raise our 2018 year-end S&P 500 target to 3000 (from 2800), reflecting upside forecasted by four of our five target models, as well as our 6% higher normalized EPS forecast reflecting the recurring impact from tax reform.
We are watching for signs to temper our enthusiasm on the S&P 500. And with 11 of our 19 bear market signposts having been triggered, the risk-adjusted reward of stocks appears less compelling. But note that since 1968, at least 80% of our signposts have been signaled ahead of prior market peaks.
Visually, the “before and after” of BofA’s price targets:
This is how BofA gets to the new and improved goalseeked number:
More amusingly, Subramanian reiterated her year-end price target for 2025 of 3,500, which she justifies as follows:
Based on current valuations, a regression analysis suggests compounded annual returns of 5% over the next 10 years with a 90% confidence interval of 0-9%. This is below the average returns of 10% over the last 50 years, but asset allocation is a zero-sum game, and 5% gains still wins in a low-return world. With a 2% dividend yield, we think the S&P 500 will reach 3500 by 2025, implying annual price returns of 3-4% per year.
The obligatory table:
To justify the latest price target, issued just months after the last one, Subramanian writes that “sentiment has improved across a variety of measures”, in other words the one thing missing from the old model was euphoria.
She adds that BofA’s sell side indicator has jumped almost 5 points since last year, indicating Wall St. strategists’ jump in equity allocation recommendations; and that according to its Global Fund Manager Survey, cash positions dropped to 4.4%, a 5-year low.
“But no need to panic yet” she implores clients: “these indicators are still not at the extreme levels of bullishness that typically coincide with the end of bull markets” especially since “the great rotation out of bonds into stocks still has yet to occur, and while valuations for equities are elevated on most measures, stocks still appear historically cheap – by a wide margin – relative to bonds.” What she did not mention is that stocks are now overvalued on 18 of 20 categories.
We wonder how BofA will justify its increasingly laughable targest once bond yields jump and the “wide margin” collapses.
Finally, the strategist warned that investors should watch for trouble signs, conceding that 11 of the firm’s 19 bear market signposts having been triggered, including things such as Fed raising rates and lack of reward to sales/EPS beat.
And now we wait for Goldman to do the same with its 2,850 year end price target on the S&P, which is just 10 points away from being crossed.