- According to Bank of America, the stock market still has significant upside potential.
- The bank said the S&P 500 could rise 25% within the next year based on bullish indicators.
- BofA’s Savita Subramanian said, “Analyst consensus expectations for long-term growth today suggest a big gain.”
The S&P 500 could rise more than 25% over the next 12 months, according to a Friday note from Bank of America’s Savita Subramanian, based on a bullish stock market indicator that measures sentiment among Wall Street analysts.
Subramaniam found that expectations for long-term profit growth among Wall Street analysts are near record lows, indicating widespread pessimism. Typically, when there is such a high level of pessimism about future corporate profits, the stock market delivers spectacular returns.
Subramaniam said, “Valuations are a powerful long-term forecasting tool, but sentiment has been more predictable about near-term returns, and the consensus among analysts today is that long-term growth expectations indicate big gains.” “Long-term growth is projected to decline from 2022 onwards, [and] “Covid sits near the lowest level.”
Wall Street currently expects total long-term profit growth of about 7% for the S&P 500, which is at similar levels to those seen during March 2020 and March 2009, two periods when stocks delivered greater gains over the next year.
Analysts expected the S&P 500 to deliver long-term profit growth of 11% a year ago, compared to the past 5-year growth level of 12%.
Just as low long-term profit expectations among Wall Street analysts have proven to be a bullish indicator for stocks, high growth expectations have proven to be a bearish signal for stocks.
“Low long-term growth [expectations] It is going fast. In fact, in November 2021, we cited elevated expectations as a bearish stance, given the strong inverse relationship between long-term growth and future S&P 500 returns, Subramanian said. The stock market went on to enter a one-year bear market just a few months later.
As suggested by this contrarian sentiment indicator, the bullish position in the stock market is being driven by analysts’ expectations of a major slowdown in profit growth for almost all sectors, including energy. But Subramaniam does not agree with this.
“Energy companies have new supply discipline. Oil supply in general is constrained,” Subramaniam argued, suggesting that oil companies would be able to handle any potential decline in the oil price.
According to the note, there are many reasons to believe profit growth going forward could beat analysts’ expectations, including a renewed corporate focus on efficiency, “which is optimistic for margin protection.”
Subramanian said, “Capex is strong, and if communication services are going to grow nearly 2x faster, incremental grid/infrastructure spending is essential and this will lead to growth in energy, metals, utilities and even retail (fixed salary growth) should benefit.”