According to Bank of America strategist Savita Subramanian, the first-half rally for stocks in 2023 is supported by fundamentals and still has upside remaining. In a note to clients on Sunday, Subramanian hiked her year-end price target for the S&P 500 to 4,300 from 4,000. This new target is around 2.6% higher than the index’s closing price on Friday. Despite stubbornly high inflation and signs of a potential recession coming later in the year, the S&P 500 has already gained more than 9% year-to-date.
Structural Shifts in Major Companies
Subramanian advised investors to take note of structural shifts at major companies, including the potential of artificial intelligence to improve efficiency. She believes that the era of easy money is behind us, but that might be a good thing. Corporate America has shifted focus to structural benefits such as efficiency, automation, and AI and has bought themselves time to adapt via long-dated fixed rate debt. Old economy cyclicals, capital-starved since 2008, have become disciplined and self-sufficient, evidenced by lower betas and more stable earnings.
Valuation Multiples
Although current valuations are not low, Subramanian argued that stocks are not overpriced despite surprisingly high valuation multiples. On cyclically adjusted earnings, valuations argue for price returns of 5% per year for the S&P 500 over the next decade, which is better than the negative returns yielded by valuation signals at the beginning of last year.
Bank of America Above Average
The new target puts Bank of America above the average in the CNBC Market Strategist Survey. The highest target among major Wall Street firms is still 4,575 from CFRA’s Sam Stovall.
Subramanian’s note to clients suggests that the first-half rally for stocks in 2023 is supported by fundamentals and still has upside remaining. Despite high inflation and potential recession later in the year, structural shifts at major companies and reasonable valuations mean that stocks are not overpriced.
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