Roughly a year from today, the S&P 500 will likely have gone nowhere, strategists at Bank of America Global Research said in their year-ahead outlook published Monday.
Equity strategists at BofA set a 2023 year-end price target of 4,000 on the benchmark index — an increase of less than 1% from Monday’s close of 3,963.94 — as annual earnings per share for the S&P 500 are seen declining 9% next year to $200.
This drop in earnings reflects a figure roughly 15% below current estimates. In the bank’s bear case scenario, BofA sees the S&P 500 falling as low as 3,000.
“One of the reasons we are more sanguine on earnings is the health of corporate and consumer balance sheets,” head of U.S. equity strategy and quantitative strategy Savita Subramanian told reporters on Monday.
A driver of the bank’s near-term bearishness is eroding profit margins, as wage growth will outpace the ability for companies to raise prices. According to BofA's research, only half of companies in the S&P 500 are posting real sales growth, with underlying sales numbers far lower than inflation-boosted headline figures.
“The best environment to be an equity investor is when pricing power is accelerating faster than wages are accelerating and people are buying more stuff,” Subramanian said. “Today might be the worst environment [for equity investors], because wages are sticky and high, prices are falling, and demand is starting to wane.”
Bank of America also said that "still-crowded mega caps," which have borne the brunt of 2022's equity rout, may stunt the gains of the majority of companies in the index. BofA's work showed that absent the 50 largest names in the S&P 500, valuations on the remaining 450 remain in-line with history.
Away from eroding profits, BofA flagged the democratization of investing and the resulting "wealth effect" seen in 2021-22 as another big risk for the market in the year ahead. The wealth effect is a behavioral economic phenomenon that suggests consumers spend more as the value of their assets rise.
According to BofA's data, some $22 trillion has been lost in financial markets this year, resulting in an estimated $700 billion hit to consumer spending power.
"Democratized investing in recent years could amplify and broaden the negative impact" on the markets and the economy, in Bank of America's view.
Subramanian noted that while 2022 was all about the Fed, 2023 will be about the real economy.
While BofA is bearish near term, the bank remains bullish over the long haul and sees the S&P 500 returning 8% annually over the next decade. The firm is advising investors to focus on the marathon and not the sprint.
The bank placed the odds of generating a positive return on the index if an investor holds it for a day at “just more than a coin flip,” or 54%, while owning the S&P 500 over the next 10 years puts the chances of making money at 94%.
“Equity investors should play the long game instead of focusing on near-term risks,” Subramanian said.
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter