Stocks are in for a bumpy ride over the next few months, but are headed higher over the long term, according to Bank of America.
Potential policy missteps in Washington, a possible resurgence of COVID-19 and uncertainty surrounding the outcome of the 2020 election provide some near-term volatility that could push the S&P 500 down by 9.23% to 3,250 into yearend, the firm’s strategists said.
However, any selling will be just a blip on the radar over the long run.
“While we are neutral to negative on stocks for the near term, we do believe that the S&P 500 can outperform other asset classes on a risk-adjusted basis over a longer time horizon,” wrote a team led by Savita Subramanian, chief U.S. equity strategist at Bank of America. “The probability of losing money in stocks meaningfully drops as time horizons extend.”
The firm raised its yearend S&P 500 target to 3,002, up from 2,481, due to a better-than-expected earnings outlook and recent changes to the Fed’s interest-rate policy. Depending on headlines, the index could finish the year anywhere from 2,200 to 4,000.
A COVID-19 vaccine could cause the S&P to underperform other equity markets, like the Russell 2000, as cyclicals, or economically sensitive names, would likely benefit. No matter what happens in the short run, Bank of America believes stocks are headed higher over the decade.
“Despite today's valuations being elevated, our price to normalized earnings valuation framework suggests returns of 3% to 4% p.a. over the next 10 years,” the strategists wrote.
Bank of America believes equities will outperform other asset classes on a risk-adjusted basis over the next 10 years and rally another 45% from Wednesday’s close to 5,200.
That return would be below the S&P’s long-term average, but a 2% dividend yield would mean equities will generate a 5% to 6% annual return, at least as good as similar quality fixed income.
Ten-year negative returns for the S&P 500 are rare, occurring just 6% of the time, according to the strategists. Commodities, meanwhile, see negative 10-year returns 30% of the time.