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However, since releasing its 2024 outlook, the bank’s optimism toward the equity market has moderated due to a notably bullish sentiment on Wall Street, the strategists added.
“The Sell Side Indicator, our key sentiment gauge, has seen increasing equity allocations and is now firmly neutral and we lower its weight in our framework. But a neutral call is rarely correct, and the net message of our market timing framework is still, in one word, UP,” the strategists wrote in a note.
The revision to its year-end target comes after BofA made adjustments to its fair value (FV) model, one of its five key indicators for setting targets.
The investment giant anticipates a decline in the equity risk premium (ERP) compared to its historical averages and an increase in normalized earnings.
A factor contributing to a more optimistic outlook on the S&P 500 is its composition change since the 1980s. Notably, the index now carries half the debt it once did, exhibits lower earnings per share (EPS) volatility, and has transitioned from being 70% comprised of asset-intensive companies to 50% consisting of asset-light companies today, strategists pointed out.
“Our base case inputs (heightened real rates, lower ERP like in the 80s and 90s) yields a target of 5050 with a bear/bull range of 4100 to 6500,” they said.
