Breaking Down BOFA’s 70+ Page Report: Is SP500 @ 5000 Inconceivable?!
It’s December 1st and the time of the year when sell side brokerage firms and their strategist teams put out their forecasts for 2024. Recall that most of these large firms have more than one “strategist” and I’ve counted some of the big banks with upwards of 10. They generally take on the old Fidelity model of publishing all their targets so inevitably, at least one of the myriads of forecasts will “prove omniscient” in the year ahead and they can advertise “we nailed it”. Our team has felt compelled to join in on this exercise for the last 5 years to help give our clients an idea on how we differ from more widely known financial firms. We typically put out our forecasts and broader market outlooks every 6 months as the world can twist and turn more than once a year. No, I’m not going to formally do that today, and I’m skipping the data and chart dump I usually incorporate into my videos this week.
Just before Thanksgiving Savita Subramaniam, the head of equity and quantitative strategies at BOFA Securities, that’s the old Merrill Lynch, put out her outlook for 2024 in a 70+ page report loaded with data. Savita is one of about 5 strategists at Merril our team follows, largely because many of them are quantitatively based. Her report’s title: “Five Reasons for S&P 500 @5000” in 2024. And investors, you would have thought she discovered the process of alchemy. CNBC splattered this across their newsfeed for days and on other financial networks and website short sellers and the forever in the bear camp went berserk with negative comments and internet posts.
While this week is not our 2024 outlook release, frequent consumers of my material should not be surprised by this week’s title: “S&P 500: 5000, Inconceivable! no it’s just more of the “Old Normal”.
If this number 5000 for the S&P 500 for 2024 looks familiar to consumers of OHFG investment content and research, it is. It is the number I’ve discussed for the 1h2024 S&P 500 optimistic outcome since the October 2022 lows, for over a year.
Savita’s system measures, weights, and then combines 5 different models measuring a range of fundamentals, valuation, and technical, weights them and then arrives at her target for 2024. Frankly I find that she uses too much data at times, but her work here does include an earnings surprise indicator, a long-tern valuation indicator, a price momentum indicator, and my favorite sentiment sell side indicator. These individual models spit out 2024 target on the S&P 500 that range from a low of 4378 to a high of 5349. She weights them based on their historical accuracy and comes up with her “official S&P500 target” which is 5000.
The financial channels and investment blogs exploded with comments on this one. Investors, a 5000 target on the S&P 500 for 2024 is NOT heresy. We’ve been discussing it for a year. You can rewatch our content and see how we arrived at it almost 1000 S&P 500 point ago, but at near 4600, like we were in summer of this year it is 1 – not a herculean call, 2- should not now illicit FOMO, or fear of missing out, or 3- tempt you to change your long-term financial plan, yet.
First, I’d like you to think of it this way. It requires you to break out your calculator. And this is exactly how I thought of it when the market reached 4600 in mid to late July of this year. This is when FOMO on the TV channels was kicking in, but our investment team messaged to be patient and that a summer pullback and buying opportunity was likely forthcoming through late October.
Ready? Break out your calculator. What is the yield on a 2-year Treasury right now? Yes, it’s about 4.955%. As of this writing last weekend the cash S&P 500 closed 4559.34 on the week. Take 4559.34 and multiply it by 1.04955. Why? Because a year from now, that would be the theoretical equivalent breakeven level of the S&P 500 versus buying a 2-year Treasury if you liquidated all your S&P 500 funds and bought a 2-year Treasury and held it for 12 months from now. What do you get? My calculator says roughly 4785. Which happens to be near our previous 2021 all-time high. And if you take 4785 and multiply it by another 1.04955y you get what number? You get roughly 5022. Which says if you had zero tax affect, if you liquidated all your stocks here and bought treasuries, vs a target of 5000 for the S&P 500 in 2024 you’re pretty much a wash on expected return, however we know that volatility in equities is historically much higher than 2-year treasuries so you would probably just buy a 2 year Treasury note and watch.
Investors, I first arrived at our yearend target and forecast for 2023 for the S&P 500 to rally back near ATH’s of 4800 in October of 2022. Our team discussed a number of metrics we used to triangulate this forecast in our videos, and with our clients and prospects and none of them were valuation, because the data and history shows time and time again that valuation over the long term measured in decades is a great forecaster of long term CAGR, over the short term measured in months and intermediate term, measured in a handful of years, it is a horrible short term timing tool.
In advance of the rally the last 12 months we discussed 1- Presidential election cycles and how the 4th quarter of the 2nd year through the first half of the fourth year was the sweet spot for investment returns historically. 2- we discussed the Federal Reserve interest rate hiking cycles and how stocks have performed during each stage of raise, pause, and lowering. 3 – we discussed investor sentiment, hedge fund and retail investor positioning, and stock market breadth cycles and how they can create positive expected return profiles for the markets when investors are positioned extremely bearishly and then flip positive as they did in late 2022. And 4- and finally, we discussed how these previous factors have historically contributed to cycles of higher and lower trending volatility in the equity markets and that these factors all triangulated to strong lower not higher volatility in late 2023 and a 4q23 rally that could reapproach 4600 near Thanksgiving to December option expiration and accelerate up into year end back near old ATH’s which were 4800. Thats the calc I get using 12 spot volatility at year end, and 5000 would be the calc for the markets into late March 2024 at 12 volatility as well. I use 12 vol as the low because outside of 2017, which investors long for again, which looks like a 100-year anomaly, 12 spot vol is as low as the market has gone for any short period of time. As in days and weeks, not months like 2017.
If you look at “old normal” we have discussed all of 2023, take the S&P500 since our October 2022 lows and overlay it with the October 1998 lows through the internet bubble peak in 2000. This is what it looks like.
If you do the math implied by this pattern and chart, you come up with the S&P 500 nearing 4800 into NYE 2023, and heightened volatility in the 1st quarter of 2024, but a new ATH nearing? Yes 5000 at the end of the first quarter 2024. Not inconceivable at all, just more of the “old normal” returning to the equity markets.
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CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.