Bank of America's head of equity and quantitative strategy, Savita Subramanian, has revised her year-end S&P 500 index forecast for the second time this year on Wednesday. She now predicts the large-cap benchmark will rise approximately 3.5% to reach a level of 4,600.
In a note to clients, Subramanian attributed the revision to the ongoing artificial intelligence revolution which she believes will boost labor-market productivity. This development is particularly beneficial for midsize companies, whose shares are not as highly valued and could thus see significant gains.
The strategist has also advised her clients to shift their investment approach. Instead of focusing on the traditional cap-weighted S&P 500 index, she recommends investing in the equal-weighted S&P 500 index. This strategy has historically shown superior performance during economic recovery periods, which she believes the U.S. is currently experiencing.
The equal-weighted index offers several advantages including attractive valuations and optimistic corporate earnings growth forecasts. It is also less crowded due to its reduced exposure to high-profile megacap technology companies such as Nvidia Corp (NASDAQ:NVDA) and Apple Inc (NASDAQ:AAPL).
Since the beginning of 2023, the S&P 500 has seen an increase of 16.2%, while the equal-weighted index has grown by just 4.1%. Despite this disparity, Subramanian suggests that the more favorable valuation of the equal-weighted index could lead to significant outperformance over the next decade, with annualized returns expected to exceed those of the traditional S&P 500 by 5 percentage points.
The strategist had previously increased her year-end S&P 500 target from 4,000 to 4,300 in May, coinciding with a surge in stocks. However, a period of stock market weakness in August led some Wall Street strategists to rethink their ambitious year-end targets.
The stock market rally in 2023 caught many off guard, as the prevailing view was that stocks would struggle in the first half of the year before rebounding as the Federal Reserve reduced interest rates in response to an anticipated recession. However, the predicted recession has not yet materialized.
While Subramanian's target is on the higher end of Wall Street predictions, analysts including Tom Lee at Fundstrat, John Stoltzfus at Oppenheimer, and Craig Johnson at Piper Sandler have set even higher targets of 4,825, 4,900 and 4,825 respectively.
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