BofA slashes S&P 500 target, sees only a fifth of market bottom signs triggered

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A mild recession in the second half of this year will weigh on the broader market, BofA Securities says.

In light of that, the equities team is lowering its S&P 500 (SP500) (NYSEARCA: SPY2022 price target to 3,600 from 4,500. That’s a drop of a little more than 5% from current levels.

The index could drop to about 3,000 to 3,200, though, before the year is over, strategist Savita Subramanian wrote in a note Thursday.

The economics team predicts five quarters of negative sequential growth, from Q1 2022 to Q1 2023. Rate strategists predicts at 10-year yield (TBT) (TLT) of 2.75% at the end 2022.

BofA also cut its full-year EPS forecast to $218 from $221 for 2022 and to $200 from $230 for 2023.

“We leave our normalized real rate assumption of 0% unchanged. But we caution that the long duration of the S&P 500 today (30+ years!) renders it highly sensitive to rates: every 10bp change in the discount rate represents 2% of S&P.” 500 fair value,” Subramanian said.

Market bottom signposts

“We found 11 indicators that have historically occurred before the market bottomed, one of which is the Fed cutting rates, which always happened before a bull market began,” Subramanian added.

“Our economists expect the Fed first cutting rates in 3Q23. Typically, more than 70% of these signposts have been triggered before the market bottomed. Currently, only 18% of these signposts are triggered.”

The two that are triggered are more bears than bulls in the AAII survey and yield curve steepening.

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