S&P 500: LT Valuation Model Implies +8% Annual Returns Over the Next Decade – BofA

By Senad Karaahmetovic

Bank of America strategists told clients that this year’s pullback in stocks offers “an attractive opportunity for long-term investors.”

Following the sharp selloff that saw the fall over 25% from its 2021 highs, Bank of America’s long-term valuation model now forecasts +6%/yr price returns, which is the highest level since May 2020.

Including about 2% from dividends, the model suggests total returns of around 8%. For the strategists, this forecast handily beats the risk-free rate of 4%.

However, the near-term picture is much more complicated. BofA strategists continue to expect more volatility in the near term and still believe the S&P 500 is yet to see ultimate lows for this downturn.

“Our bull market signposts continue to suggest that the market hasn’t yet bottomed, with only 20% triggered today vs. 80%+ before prior market bottoms – also see bull market signposts deep-dive. We continue to recommend High Quality stocks (B+ or better in S&P quality rating) with strong FCF,” strategists wrote in a client note.

On what to own in a very volatile market, they told clients to own Energy, while Materials continue to rank the worst in BofA’s tactical sector framework.

“We still like the trade on services (Energy) > goods (Materials) and geopolitical hedge (Energy) > China risk (Materials),” strategists concluded.

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