BofA’s Subramanian Sees S&P 5,000 In 2024

5,000. And a new record high.

That’s what BofA’s Savita Subramanian sees for the S&P 500 in 2024.

Subramanian on Tuesday said BofA’s equities team is bullish “not because we expect the Fed to cut, but because of what the Fed has accomplished.”

Corporate America, meanwhile, has acclimated to the new macro-policy regime. “Companies have adapted (as they are wont to do) to higher rates and inflation,” Subramanian wrote, on the way to listing addition reasons to like stocks and particularly cyclicals.

Outside of “A.I. love” and investors’ infatuation with the “Magnificent 7,” the market is still populated by “convictionless equity bears,” Subramanian said, citing the lowest pension equity weights in a quarter century, underwater sell-side targets, low long-term earnings growth estimates and active funds “hugging their benchmark.”

The figures above illustrate several of Subramanian’s points. Recall that some key discretionary cohorts were caught offside repeatedly in 2023. I recapped that dynamic last week while editorializing around the nascent bullish sentiment shift in BofA’s Global Fund Manager survey.

Relatedly, the sellside spent the better part of this year catching up to a rally that few predicted. Just when it looked like bears might be vindicated, a run of soft data earlier this month and accompanying Fed pivot speculation catalyzed a sharp decline the dollar, a big drop in bond yields and a rekindled cross-asset “everything rally.”

For all the talk of naively optimistic long-term earnings growth expectations, when you strip out the “Magnificent 7” (and exclude the anomalous plunge during the earliest months of the pandemic), those expectations have never been lower

“Consensus long-term growth expectations have plummeted to lows of 9%,” Subramanian noted, adding that if past is precedent, that presages outsized returns.

The scatterplot on the right, above, shows “a strong inverse relationship between LTG expectations and future S&P 500 returns,” Subramanian remarked, adding that “today’s LTG forecast yields 22% total returns over the next 12-months for the S&P 500, all else equal.”

As some readers may be aware, BofA’s official house call for the S&P is based on a combination of five models. The most bullish model (the sell-side indicator, a contrarian input) gets the highest weight.

Note that BofA’s fair value model for the S&P is the most bearish input — its target for the benchmark is just 4,378.

Both of those indicators are medium-term. The bank’s long-term valuation model, which points to SPX 4,800 by year-end 2024, is worth a mention.

Subramanian is always keen to remind investors that over the long-term, valuation is virtually all that matters. Specifically, valuation explains around 80% of stock returns over a 10-year holding period. Currently, the S&P is trading 40% rich to its long-term average.

“Today’s multiple of 22x normalized earnings implies +4.5%/yr annualized returns over the next decade based on the historical relationship,” Subramanian wrote.

There’s quite a bit more to BofA’s 2024 outlook for US equities, where “quite a bit more” means Subramanian’s effort is an impressive 79 pages. I’m sure I’ll revisit it and highlight other key points in the days and weeks ahead, but the brief summary above captures the gist of it.

Commenting further on sentiment and positioning, Subramanian wrote that “Bull markets typically end with high conviction and euphoria — we are far from that.”

Recall that Subramanian lifted her year-end target for the index to 4,600 on September 20. At the time, stocks were in the middle of a three-month losing streak tied to an inexorable rise in long-end Treasury yields.

A few readers (and plenty of “clever” observers on finance-focused social media) subsequently joked that the sell-side’s most famous bear was vindicated and that Subramanian picked an inopportune moment to raise her forecast.

Fast forward six weeks and the S&P is at Subramanian’s target. The index would need to fall 650 points between now and New Year’s to match the year-end target of Wall Street’s stalwart bear at Morgan Stanley.