According to Bank of America Global Research strategists, in their full-year outlook published on Monday claimed that the S&P 500 will probably have gone nowhere in about a year.
As annual profits per share for the S&P 500 are expected to rise 9% and will decrease to $200, equity strategists at BofA have set a price target for the benchmark index of 4,000 for year-end 2023, up less than 1% from Monday’s finish of 3,963.94. That profit decline falls approximately 15% short of current estimates. According to BofA, the S&P 500 may fall as low as 3,000 in the bank’s worst-case scenario.
As wage growth will surpass businesses’ capacity to raise prices, this is one reason why the bank is near-term bearish. According to BofA analysis, only 50% of S&P 500 companies are reporting real sales growth, with underlying sales statistics significantly lower than inflation-adjusted headline rates.
Savita Subramanian, the head of U.S equity strategy and quantitative strategy told the reports that “ One of the reasons we are more Sanguine on earnings is the health of corporate and consumer balance sheets.”
“The best environment for stock investors is when pricing power increases faster than wages and people are buying more stuff. Today is maybe the worst environment because wages are firm and high, prices are falling and demand is falling,” she added.
Falling profit margins brought on by wage growth outpacing companies’ capacity to raise prices are one-factor contributing to the short-term bear market for banks. Only 50% of the S&P 500 companies, according to BofA analysis, are witnessing actual revenue growth, with underlying sales far below headline inflation rates.
According to Bank of America, the majority of the index’s companies may not see gains due to “still-crowded mega-caps,” which took the brunt of the 2022 stock market crisis. BofA research states that the valuations of the remaining 450 S&P 500 companies would still be historically accurate even without the top 50 companies.
Aside from declining profitability, BofA identified the “wealth effect” that will arise from the democratization of investment in 2021-22 as another significant danger for the market in the coming year. According to the wealth effect, a behavioral economic theory that contends customers spend more as the worth of their possession increases.
According to the data from BofA, the financial markets have lost almost $22 trillion this year, which has reduced consumer purchasing power by about $700 billion.
Bank of America stated that the democratized investing in recent years could amplify and widen the negative impact on the economy and markets.
While 2022 would be all about the Fed, 2023 would be about the real economy, according to Subramanian.
BofA forecasts the S&P 500 to return 8% annually over the following ten years, despite the bank’s near-term bearishness. The business suggests that investors concentrate on race rather than a sprint.
The bank predicted that owning the S&P 500 for the next 10 years boosts the odds of a return to money by 94% while owning the index for a day increases the probability of earning a positive return from an investor to “barely more than a coin toss,” or 54%.
According to Subramanian, “Equity investors should play the long game instead of focusing on short-term risks.”
Bank of America was founded in San Francisco in 1930 under the name of Bank of Italy. This multinational corporation has grown as one of the world’s leading financial institutions which serves individuals, small-middle market businesses, large corporations, and government with its services.
Bank of America has faced significant instability in the markets due to COVID-19 for the past two years. But in 2022, it saw the stock raised nearly 40% as it generated $22 billion in profit. The coming year may witness a surge in stocks and profit of Bank of America, according to the reports.
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