By Pradeep Saran
Sep 17, 2023, 09:23 PM
In a recent report from Bank of America’s Savita Subramanian, it is suggested that the S&P 500 could experience a significant surge of over 25% within the next 12 months. This optimistic forecast is based on a bullish stock market indicator that gauges sentiment among Wall Street analysts.
Subramanian’s analysis points out that long-term profit growth expectations among Wall Street analysts are currently hovering near historic lows. This pervasive pessimism in the market often serves as a signal for a potential upswing. Typically, when there is a high level of pessimism regarding future corporate profits, it tends to precede remarkable returns in the stock market.
“Valuation is a powerful tool for long-term forecasting, but sentiment tends to be more predictive of short-term returns. Analysts’ consensus on long-term growth expectations today suggests substantial gains,” Subramanian explained. “The forecast for long-term growth has declined since 2022 and is now close to the levels seen during the COVID pandemic lows.
“At present, Wall Street is anticipating a total long-term profit growth rate of approximately 7% for the S&P 500. This is on par with the levels witnessed in March 2020 and March 2009, both of which were periods when the stock market delivered robust returns.
Just a year ago, analysts were projecting an 11% long-term profit growth for the S&P 500, while the trailing 5-year growth rate stood at 12%. The shift from these elevated expectations to the current lower ones is seen as a positive sign for the market.
Subramanian highlights that historically, low long-term profit expectations among Wall Street analysts have been a bullish indicator for stocks. Conversely, high growth expectations have often been a bearish signal.
“Low long-term growth expectations have typically been bullish. In November 2021, we identified lofty expectations as a bearish setup due to the strong inverse relationship between long-term growth and future S&P 500 returns,” Subramanian noted. Shortly after this assessment, the stock market entered a year-long bear market.
This current bullish sentiment is driven in part by analysts’ expectations of a significant slowdown in profit growth across various sectors, including energy. However, Subramanian holds a different view.
She argues that energy companies have adopted newfound supply discipline, and there is a general constraint on oil supply. This suggests that oil companies may effectively navigate any potential declines in oil prices.
Furthermore, Subramanian points to reasons for optimism in beating analyst expectations for profit growth. These factors include a renewed corporate focus on efficiency, which bodes well for margin preservation.
“Capital expenditure is robust, and if communication services are expected to grow at an accelerated rate, additional investments in infrastructure and the grid will be necessary. This should benefit sectors such as energy, metals, utilities, and even retail, with wage growth showing resilience,” Subramanian explained.
The bottom line: the stock market appears to be positioned for significant gains in the coming year, driven by a contrarian sentiment indicator that reflects the prevailing pessimism among Wall Street analysts regarding long-term profit growth. While there are concerns in the market, such as a slowdown in profit growth, there are also factors indicating potential outperformance, particularly in sectors like energy.