By Senad Karaahmetovic
BofA analysts see “balanced” risks for stocks as the S&P 500 trades near the broker’s year-end 4,000 price target.
On the other hand, cash is a “compelling alternative” to stocks given it yields ~5% returns.
“If financial stability worsens rather than improves, a backdrop of easier Fed/tighter credit hasn’t been good for the S&P 500. But sentiment based on our Sell Side Indicator (SSI), suggests that this and other reasons to worry about stocks are well aired, and argue for a positive surprise – especially vs. last year’s bullish complacency,” analysts said in a client note.
They highlight that BofA’s indicator - S&P 500’s price to normalized earnings - indicated capital returns of over 5% a year over the next decade for the S&P 500.
“Add ~2ppt of dividend yield and this rivals prospects for most other asset classes,” the analysts added.
On how attractive Treasuries are, they remind investors that stocks have outperformance bonds historically.
“Long duration bond risks are elevated: we are coming off an all-time low in rates, with yields still below inflation. The two biggest buyers of 10-yr Treasuries (the Fed & China) are no longer buyers. And bond sentiment is euphoric, with Wall Street recommending the highest allocation to bonds in 10 years,” the analysts added.
Another reason to own stocks over bonds is that corporations can shorten the duration by returning cash. Moreover, dividends are likely to increase from here.
“Since 1936, dividends contributed 37% of total return but <20% over the past decade. From here, dividends’ contribution to total returns could rise demonstrably,” analysts concluded.