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BofA says S&P 500 could drop to 3000 in H123 before rallying.
The upcoming 2023 year is likely to be a year of two halves as far as the equity market is concerned, according to Bank of America strategists.
The strategists warn investors that “a slew of 1H bears is forming,” which makes them nervous about the outlook for stocks in 2023. As a result, they expect to see the S&P 500 dipping to as low as 3000 in the first half of the next year on recession risks, earnings cuts, and QT/high-inflation.
The major selloff should be seen as a buying opportunity as the S&P 500 is then expected to rally sharply on uncertainty, rates volatility, and improving earnings revisions.
“This view is now firmly consensus on the buyside and the sell side: in a recent survey of clients on our conference call only 15% of respondents were positive on equities next year, but over 60% expected a sell-off in 1H followed by a 2H rally,” the strategists wrote in a client note.
Bank of America’s Sell Side Indicator is still generating bullish signals for equities while the firm’s long-term valuation model forecasts “healthy +5%/yr price returns over the next decade.”
The strategists also warned investors to avoid “being invested in the wrong stocks.” Along these lines, they are telling the firm’s clients to avoid being invested in mega caps and remain active in 2023.
“We expect another volatile year and recommend owning High Quality stocks (Sleep at night). But today’s High Quality stocks look different than a few years ago (e.g. Energy & Financials are much higher quality today). We expect dividends to represent a much bigger chunk of total returns going forward – we highlight steady eddy Quintile 2. We expect re-shoring to drive a robust capex cycle over the next few years – benefitting capex/automation beneficiaries and SMID caps over large caps,” the strategists concluded.
