Bank of America hikes its stock market forecast for 2018, but is on the lookout for any reason to turn bearish – Business Insider

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  • Equity strategists at Bank of America Merrill Lynch raised their year-end price target on the S&P 500 to 3,000 from 2,800. 
  • “We are watching for signs to temper our enthusiasm on the S&P 500,” they said in a note. Still, they noted that the year right before a market peak is usually one of the most profitable. 
  • They see evidence that investors aren’t getting ready to exit the stock market just yet. 

Bank of America Merrill Lynch just got even more optimistic on the stock market, but is on standby for any reason to be less bullish. 

The equity strategists led by Savita Subramanian raised their year-end target on the S&P 500 to 3,000 from 2,800, implying an 11% gain for the market this year. The index has already risen 6% this year to within 3% of where the average year-end forecast on Wall Street projected it would end the year. 

Underpinning BAML’s new forecast is evidence that investors aren’t heading for the exits anytime soon.

The firm’s survey of fund managers shows that cash positions are at a five-year low. The so-called great rotation out of bonds and into stocks still hasn’t happened, as the bond market continues to extend its three-decade bull market. And although stocks are expensive by many valuation measures, they’re still historically cheap compared to bonds. 

BAML’s higher forecast was also driven by the recently passed tax cut plan, which the firm expects will contribute to 6% growth in normalized earnings per share. 

But there’s still the nagging question of when the bull market will run out of steam, or before that, when the market resumes having regular pullbacks. After all, as Subramanian said, more than half of the firm’s bear-market signals have been triggered. 

“We are watching for signs to temper our enthusiasm on the S&P 500,” Subramanian wrote in a note on Tuesday. “And with 11 of our 19 bear market signposts having been triggered, the risk-adjusted reward of stocks appears less compelling.”

But the strategists don’t see any reason to panic now. “Note that since 1968, at least 80% of our signposts have been signaled ahead of prior market peaks,” Subramanian said.

Moreover, missing out on late stage of a bull market has historically been a costly mistake; the S&P 500 has returned 49% on average in the 24 months before every market peak since 1937. 

Get the latest Bank of America stock price here.

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