Despite another run at record highs in the stock market, Bank of America strategists see "more downside risk to the S&P 500 through year-end," with a target of 4,250, about 7% below late-afternoon trading on Tuesday.
They cite extended valuations and near-euphoric market sentiment as well as supply chain issues, labor inflation, potential tax increases, an energy crisis, China GDP risks and peak globalization posing risks for the continued stock market rally. Federal Reserve tapering, which could begin before year-end, will also weigh on this year's stock market. "Based on the historical relationship, tapering is estimated to result in 3% downside in the S&P 500 by year-end and a flattish market through year-end 2022," according to the BofA report.
The strategists' longer-term outlook is also pessimistic, suggesting a minus 0.5% annualized price return over 10 years, its first negative return forecast since 1999.
The strategists, led by Savita Subramanian, stress "dividend preservation and growth as the single most important criteria for stock selection" over the next 10 years. That focus could potentially mean the difference between a flat to negative returns and positive returns for the S&P 500 over the next 10 years, according to the BofA report.
Although third-quarter earnings and margins are beating expectations, margins are expected to peak next year due to increasing labor costs and longer lasting supply chain risks, according to BofA.
