BofA Strategists Cut S&P 500 Projection

The S&P 500 has dropped 13% so far this year, and many experts are turning more bearish toward stocks.

Bank of America strategists led by Savita Subramanian list some of the unanticipated negative factors that have cropped up this year.

“What’s changed since Jan. 1?” they ask rhetorically in a commentary. “We weren’t forecasting a war, and the Russia/Ukraine conflict exacerbated commodity price inflation and also hit Europe GDP hard.”

In addition central banks, particularly the Federal Reserve, have turned much more hawkish, the strategists noted.

“China growth is worsening and other cyclical indicators have rolled over. This is all against a backdrop of cyclically-peaked S&P 500 [earnings] facing secular margin pressure (deglobalization), still lofty valuations and a Fed taper still in play.”

As for valuations, the S&P 500’s forward price-earnings ratio recently stood at 18.1. That’s below the five-year average of 18.6 but above the 10-year average of 16.9.

33% Recession Probability

“Note that the average peak-to-trough decline in the S&P 500 amid recessions has been about 32%,” the strategists said. “Thus, the S&P’s 10% year-to-date decline can be very roughly interpreted as discounting a one-third chance of a recession.”

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BofA strategists have cut their year-end target for the S&P 500 to 4,500 from 4,600 previously. The new figure would still represent an 8% gain from the recent level of 4156.

On the positive side, the analysts cite “better-than-expected consumption (especially in the lower income cohort), despite inflation, and a big uptick in spending on services.”

They see “a healthy consumer/corporate balance sheet backdrop after the $20 trillion cash handoff from the Federal Reserve and government.”

As for sectors, the strategists like consumer staples amid the recession threat. They also favor energy stocks, with travel and leisure spending helping oil, and healthcare.

In a separate BofA report, from strategists led by Michael Hartnett, they say that a move below 4,000 by the S&P 500 could be a “tipping point” leading to “pain” and a massive “exit” by investors.

Role of the Fed

Meanwhile, Steven Blitz, chief economist of investment research firm TS Lombard, said the Fed is trying to push stock prices down.

“The Fed’s communicated policy trajectory was intended to weaken equities,” he wrote in a commentary. “Equities and the dollar are the Fed’s main conduits to impact the economy and, in turn, inflation.”

The Fed has called for a tightening of financial conditions, which indeed include stocks and the dollar. 

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