Stocks to buy before earnings.Caspar Benson/Getty Images
There’s still significant upside potential in the stock market, according to Bank of America.
The bank said the S&P 500 could surge 25% within the next year based on a bullish indicator.
“Analyst consensus long-term growth expectations today suggest big gains,” BofA’s Savita Subramanian said.
The S&P 500 could surge more than 25% over the next 12 months based on a bullish stock market indicator that measures sentiment among Wall Street analysts, according to a Friday note from Bank of America’s Savita Subramanian.
Subramanian observed that long-term profit growth expectations among Wall Street analysts are near record low levels, which signals pervasive pessimism. Typically, when there’s such a high level of pessimism towards future corporate profits, the stock market delivers spectacular returns.
“Valuation is a powerful long-term forecasting tool, but sentiment has been more predictive of near-term returns, and analysts consensus long-term growth expectations today suggest big gains,” Subramanian said. “Forecast long-term growth plummeted from 2022, [and] sits near COVID lows.”
Wall Street currently expects total long-term profit growth of about 7% for the S&P 500, which is at similar levels seen during March 2020 and March 2009, two periods when stocks delivered outsized gains over the following year.
Analysts expected the S&P 500 to deliver long-term profit growth of 11% a year ago, while the trailing 5-year level of growth has been 12%.
Just as low long-term profit expectations among Wall Street analysts has proven to be a bullish indicator for stocks, elevated growth expectations has proven to be a bearish signal for stocks.
“Low long-term growth [expectations] has been bullish. In fact in November 2021, we cited lofty expectations as a bearish set-up, given the strong inverse relationship between long-term growth and future S&P 500 returns,” Subramanian said. The stock market went on to enter a year-long bear market just a couple months later.
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The bullish stock market setup, as suggested by…
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