This post was originally published on this site
Adek Berry/Agence France-Presse/Getty Images
U.S. stocks will give back some ground by year-end, but not as much as previously expected, according to BofA Securities equity and quant strategist Savita Subramanian, in a Thursday note titled, “The New Abnormal.
Citing a lower discount rate on future income and improved earnings fundamentals, BofA raised its end-of-year S&P 500 index SPX, -3.51% target to 3,250 from 2,900. That’s still around 5.5% below its level late Thursday, as stocks tumbled sharply in a sell off led by technology stocks. The S&P 500 was down 3.8% in Thursday’s session, while the Dow Jones Industrial Average DJIA, -2.77% dropped more than 900 points.
“Near-zero real rates are apparently the new normal. The quality composition of the S&P 500 has improved (largely by cyclical sectors getting smaller), warranting a lower equity risk premium,” Subramanian wrote. “And fundamentals have improved: the ratio of upward to downward management guidance is the highest since Reg FD,” a regulation put in place in 2000 that limits nonpublic information disclosures by public companies.
Meanwhile, the hit to sales from the COVID-19 pandemic was offset by the record sales for tech and other social-distancing beneficiaries, she noted.
The range of outcomes, however, remains wide. BofA’s “realistic worst case” (second wave of coronavirus, double dip recession) vs. “best case” (COVID-19 vaccine, fiscal stimulus, continued low interest rates) scenarios is roughly 2200 to 4000, she said.
It’s premature to declare the market “out of the woods,” she said, noting that the months running up to an election typically see a rise in volatility while “super accommodative policy is hitting some speed bumps — failure to pass more stimulus, proposed corporate tax hikes, etc., pose risks.”
Also, a COVID-19 second wave risk could increase during back-to-school season, and layoffs are accelerating. Also, more bear market signposts have flipped negative, while valuations are extended on all measures except relative to bonds.
On the plus side, “liquidity is abundant, with dry powder at private and public funds, high cash allocations among individuals, still tepid sentiment on stocks, and not a lot of better income options than U.S. equity dividends,” she said.
