S&P 500 Sets Sights On 5,400, But Analyst Warns Of Imminent Market Volatility

Bank of America’s equity strategist Savita Subramanian on Sunday revised the year-end target for the S&P 500 to 5,400, up from the previous target of 5,000, signaling a modest 5% upside potential.

Despite a more positive outlook, there’s an acknowledgment of the market’s sentiment improvements, which introduces a layer of uncertainty in the near term.

“The Sell Side Indicator, our key sentiment gauge, has seen increasing equity allocations and is now firmly neutral,” the analyst says, adding that “a neutral call is rarely correct, and the net message of our market timing framework is still, in one word, UP.”

The fair value model suggests a realistic bull to bear case range for the S&P 500, from 4,100 to 6,500.

Earnings Outlook And Economic Indicators

A notable aspect of Subramanian’s analysis is the emphasis on earnings stability and potential for growth, underpinned by leading economic indicators.

The report celebrates a 4% beat in Q4 EPS and identifies factors that could further bolster 2024’s EPS forecast of $235. “Leading indicators argue for upside to our 2024 EPS forecast,” Subramanian says, suggesting a recalibration of expectations in light of recent data.

The narrative around corporate earnings is one of adaptation and resilience. “As we exit an era of arbitrary, low-quality growth…corporates have nimbly shifted focus to productivity,” she says, highlighting a strategic pivot that could sustain earnings momentum.

Sentiment And Market Themes

While Subramanian observes an overall uplift in the market, she urges caution against excessive enthusiasm, particularly in sectors experiencing pockets of euphoria such as AI and GLP-1 therapy.

“Bull markets end with euphoria. We’re not there yet,” she comments, tempering expectations with a reminder of the market’s historical patterns and the current sentiment landscape.

Looking Ahead: Market Dynamics And Anticipated Movements

The report does not shy away from predicting near-term market challenges, consistent with historical trends of volatility.

“On average since 1929, 5% pullbacks have occurred three times a year and 10% corrections have occurred once per year,” the analyst writes.

Subramanian points to technical and cyclical factors that could precipitate a pullback, yet remains optimistic about the market’s resilience and potential for a year-end rally.

Bank of America’s technical strategists have identified a significant market discrepancy, underscoring a divergence between the rising S&P 500 index price and the decreasing share of stocks trading above the 50 or 200-day moving averages.

The SPDR S&P 500 ETF Trust SPY has seen an impressive climb, registering gains in 16 of the last 18 weeks. However, the percentage of stocks trading above the 50-day moving average has dwindled from nearly 85% at the year’s outset to a current level of 68%.

This observation accentuates a growing disconnection within the index, signaling a concerning lack of market breadth.

“Market pullback is likely, but so is a year-end rally,” she predicts, balancing near-term caution with a forward-looking optimism.

Chart: S&P 500 Sets New Highs, But Fewer Stocks Break Above 50-Day Average