Investors can look for the bull market in global equities to continue in 2015, though returns will slow to single-digit rates.
BofA Merrill Lynch Global Research based this forecast in its annual year-ahead outlook, released Tuesday, on strong fundamentals and robust growth in the U.S. economy.
It cautioned, however, that in the lower-return, higher-volatility environment ahead, selective allocation and defensive portfolio moves would be crucial for performance.
"While our key measures suggest that the bull market in equities can continue, the sentiment is far from euphoric," Candace Browning, head of BofA Merrill Lynch Global Research, said in a statement.
"The world appears to be under-allocated to stocks, and we believe we are still only a third of the way into the Great Rotation from bonds."
Browning said BofA Merrill Lynch was maintaining its long-term sector weightings in the U.S., with no changes from 2014, as many of last year macroeconomic expectations had been delayed.
"In the current environment, now is the time for investors to be highly selective and make tactical moves to position portfolios for more thematic investing in a transforming world," she said.
(Check out some economic predictions for 2014 by Jeffrey Gundlach and Bob Doll.)
BofA Merrill Lynch said healthy U.S. economic growth boded well for U.S. employment, wages and housing in 2015.
It expected core inflation to remain steady, and noted that with the new year about to begin, confidence was high, oil prices low, the dollar strong and Washington relatively calm.
BofA Merrill Lynch said its research team's sentiment had shifted from extremely bullish to slightly so as stocks approached fair value.
It expected the U.S. Federal Reserve to begin hiking interest rates, probably starting in September, and said investors could anticipate three key changes: lower liquidity, wider credit spreads and higher volatility.
Following are 10 macro calls the BofA Merrill Lynch Global Research team made in its outlook for the year ahead.
1. S&P 500 Index at 2200
Although BofA Merrill Lynch believes that the era of excess returns and excessively low volatility is in the past, it expects the secular bull market in stocks to continue. It says expected gains in the year ahead imply a price return of approximately 6%, in line with an anticipated modest deceleration in earnings growth.
2. U.S. and Global Economic Growth
BofA Merrill Lynch expects the U.S. economy to continue to grow next year on the strength of nearly recovered household and corporate balance sheets and more stable federal, state and local fiscal policy. In 2015, it projects U.S. GDP growth of 3.3%, global real GDP growth of 3.7% (up from 3.2% in 2014) and Euro area GDP growth of 1.2%.
3. Emerging Markets
According to the outlook, stronger U.S. growth, lower energy prices and cyclical rebounds in several big economies such as India and Brazil should push economic growth in emerging markets to 4.5% next year, up from 4.2% in 2014 but below the consensus call of 4.8%.
4. Inflation, Disinflation and Deflation
Low inflation is driving policies in every country. The outlook expects U.S. core inflation to remain well below the Fed's 2% target at about 1.5%.
The global backdrop, meanwhile, is disinflationary. In 2015, BofA Merrill Lynch expects Japan to focus on ending deflation, while Europe must deal with a major threat of outright deflation, "which if it occurs, could trigger another debt crisis."
