Many analysts have spent the past few weeks advising investors to buy the dips and pointing to unprecedented levels of fiscal and monetary stimulus, among other things, as reasons to be bullish on stocks.
Not BofA head of equity research Savita Subramanian. On a mid-year outlook briefing webinar, Subramanian explained that her year-end target for the S&P 500 SPX, +0.78% is 2900: an 8% decline from current levels. She offered one bull case for stocks — that they’ve rarely been so attractive, relative to bonds — but also noted a litany of headwinds.
“I wouldn’t paint myself as a bear but the risks between here and year end are completely to the downside,” Subramanian said. “We’ve had a reopening frenzy and now we’re seeing payback.”
What are the headwinds?
Millennials, who got socked with the financial crisis and Great Recession of 2008 just as they were about to start their working lives, now face another economic calamity just as they may have finally started to find some footing. That means consumer spending won’t be anything like it was in the past, Subramanian thinks. Consumers may adopt a “recession or even depression-like” spending mentality.
By nearly any metric — see the table below — stocks are extremely expensive.
Stocks are expensive, no matter how you slice it. Source: BofA
And yet, over the past two decades, margin expansion has been largely driven by globalization, falling interest rates, and tax cuts — all of which stand a big risk of reversing.
A Democratic victory in November will likely have the effect of reversing many market-friendly policies, Subramanian thinks.
She also calls herself “really worried” that a lot of growth has been pulled forward from the future, in the form of fiscal and monetary stimulus, into today’s economy to plug the hole created by COVID.
Finally, in response to the often-asked question about why markets seem to be so disconnected from the real economy, Subramanian said that she doesn’t think the stock market is pricing in that “everything is great.” Investors continue to reward stocks that will continue to benefit from coronavirus-induced lockdowns, such as technology leaders and online retailers. Her own view is that investors should overweight consumer staples, industrials, technology, and financials, in that order.
“The market isn’t pricing in an all-clear on the economy,” Subramanian said.