S&P 500 has peaked this year, Bank of America forecasts

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The S&P 500 Index has probably already logged the gains it will see this year, but the benchmark still presents ample opportunities for investors, according to Bank of America Corp.

The firm reiterated its year-end forecast for the U.S. stock gauge of 5,400, roughly in line with where it is now after gaining around 15 per cent so far in 2024.

While neutral on the index overall, BofA’s Savita Subramanian says there’s potential for strong returns in a few areas: among dividend payers, “old school” capital-expenditure beneficiaries like infrastructure, construction and manufacturing stocks, and other themes that don’t revolve around artificial intelligence.

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“In mid-2023, sentiment was deeply negative and our toolkit suggested that the direction of economic and earnings surprises was more likely positive than negative,” Subramanian, the firm’s head of U.S. equity and quantitative strategy, told clients in a note dated July 29. “Today, sentiment is neutral and positive surprises are ebbing.”

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U.S. stocks were little changed Tuesday ahead of earnings announcements from American technology giants this week, with results from Microsoft Corp. due after the close. Meta Platforms Inc., Apple Inc. and Amazon.com Inc. will follow in coming days, with investors also awaiting the Federal Reserve’s latest policy decision on Wednesday.

After setting a record high in mid-July, the S&P 500 has been struggling to gain traction lately following a swath of lacklustre earnings and as investors flee heavily weighted megacap shares for smaller companies on expectations the Fed will start cutting interest rates as soon as September.

Declines of 5 per cent or greater in the S&P 500 have occurred three times per year on average and corrections of 10 per cent or more once per year, based on data going back to 1936, which makes a pullback overdue, according to Subramanian. Moreover, August and September are seasonally weak periods for U.S. stocks, and the U.S. presidential election in November is likely to ramp up volatility.

While BofA strategists expect index gains to slow through December, “a full-fledged bear market is unlikely,” Subramanian said.

With assistance from Jessica Menton

Bloomberg.com

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