- According to Bank of America, there is less chance of a “lost decade” in the future despite this year’s 25% stock market decline.
- According to the bank’s long-term valuation model, annualized gains will be 6% in the next decade.
- However, the stock market is not yet out of trouble. There could be more pain in short-term.
There have been Warnings about a lost decade: MoreHowever, the odds of this actually happening are not insignificant. appear less likelyThis is despite the 25% drop in this year’s sales.
This is according to a Friday note by Bank of AmericaSavita Subramanian was a strategist and was the first to go to Wall Street. To warn about a lost decade in the latter part of last year.
She pointed out that falling stock markets can also lead to falling valuations. These are starting to look attractive for long-term investors. The S&P 500’s price-to-earnings multiple has compressed considerably so far this year, with the trailing and forward P/E ratios falling 36% and 29%, respectively.
According to a bank valuation model, the bank expects forward annualized price return of 6% S&P 500Over the next ten years. This is the highest forecast return since May 2020.
“Valuation matters long-term, explaining ~80% of subsequent 10-yr S&P 500 returns,” Subramanian said. Long-term investors have an opportunity to profit from this year’s bear markets.
If the forecast is accurate, it would put the S&P 500 at just above 6,500 by 2032, representing potential upside of nearly 80% from Thursday’s close. Subramanian estimates that the total annualized returns of the S&P 500 could rise to 8% with an addition of a dividend yield of 2%.
However, while long-term forecasts are looking better than ever in more than two years, they look less optimistic for the stock market short-term and she stated that “near-term pain still” is a concern.
“While the S&P 500 fell below our year-end target of 3,600, we continue to expect volatility in the market,” Subramanian said, adding that only 20% of her bull market indicators have flashed positive so far. According to Subramanian, 80% of these indicators have flashed green in the past stock market bottoms.
She said that stocks are suffering from higher inflation in the service sector than in the goods. “Unlike the US economy (70% services), S&P 500 earnings are 50/50 goods/services. The moderating of goods inflation is an indicator for weakening pricing power in goods-oriented firms.
Subramanian stated that the Federal Reserve is more hawkish than ever and should continue to raise interest rates. This increases the likelihood of a hard landing. This would place the bank’s credibility at risk. recession-scenario S&P 500 price target of 3,000 into playSubramanian would be likely to find long-term valuations more appealing.
