Bank of America: Five reasons to support US stocks reaching a new high in 2024, with the S&P 500 surpassing 5000 points.

For stock market investors, the US stock market in 2023 is like heaven. Riding the wave of AI, the S&P 500 index has risen nearly 20% year-to-date. As we enter 2024, with the Federal Reserve expected to cut interest rates, can the US stock market continue its stellar performance?

Bank of America Merrill Lynch believes that next year the US stock market may still be a paradise for investors. They predict that by the end of 2024, the S&P 500 index will reach 5,000 points, representing an increase of about 10% from Tuesday's closing price.

In a report released last week, analysts Derek Harris and Thomas Hopkins from the bank stated that the equity risk premium may further decline, especially outside the technology industry.

"We have already passed the peak of macro uncertainty."

Bank of America Merrill Lynch believes that the market has fully priced in geopolitical crises, the Federal Reserve has achieved success in combating inflation, and companies have adapted to high interest rates and inflation. They expect the US economy to achieve a soft landing next year, but the growth rate will be significantly lower than trend growth.

Five reasons for the rise of the US stock market

Bank of America Merrill Lynch is optimistic about the performance of stocks, especially cyclical stocks, next year, based on the following five reasons:

Investor sentiment is still low, the bull market in US stocks is far from over

Firstly, despite recent improvements in investor sentiment, data shows that most bearish investors still lack confidence (excluding technology/artificial intelligence stocks).

Pension fund stock allocations are at their lowest level in 25 years, most sell-side institutions' year-end target prices are still higher than current levels, long-term earnings growth expectations for the S&P 500 index are at a low point (except during the 2020 pandemic), and active funds are following benchmarks and are unwilling to invest actively.

Bull markets usually end during a period of high confidence and rapid rise, and the US stock market is still far from that stage.

Bank of America Merrill Lynch analysts are optimistic about the economic situation next year

A survey conducted by Bank of America Merrill Lynch on the outlook for 2024 shows that inflation will slow down but not turn negative, corporate profit margins will continue to improve, wage inflation pressures will persist but will be offset by efficiency gains and other cost reductions.

The institution's enthusiasm for cyclical stocks is growing.

Even if GDP growth slows down, earnings per share may accelerate?

Bank of America Merrill Lynch points out that there is precedent for earnings per share to accelerate while GDP growth slows down. They predict that earnings per share will reach $235 in 2024, representing a 6% year-on-year growth.

The 1950s set a precedent: earnings per share experienced six quarters of troughs before an economic recession and continued to grow during the recession. The normalization of goods and services also indicates profitability.

Accelerating earnings per share and decelerating GDP have been the best environment for stocks (rising) since 1950. Learning from history, election years are explosive years for the US stock market

Generally speaking, election years, which are the fourth year of a presidential term, are favorable for the US stock market.

In the 24 election cycles from 1928 to 2020, the S&P 500 index has risen by 75% in the fourth year of a presidential term, with an average return rate of 7.5% and a median return rate of even higher at 10.7%. The fourth year is the second best year in the presidential term, second only to the third year.

Bank of America Merrill Lynch pointed out that both parties' support for defense spending and nearshore/American manufacturing is pro-cyclical, while fiscal tightening poses a risk to healthcare, which faces the highest risk among non-defense sectors. Similar to previous election years, volatility may increase in the second half of the year.

Advantages of the US stock market: De-globalization, oil, the US dollar, and the baby boomer generation

Bank of America Merrill Lynch believes that there are several advantages supporting the rise of the US stock market:

In the process of de-globalization, the return of US companies has promoted economic re-industrialization, and rising oil prices have increased earnings per share, maintaining US energy security.

In addition, the US dollar's reserve currency status has given the US greater room to deal with its fiscal deficit, and the baby boomer generation has accumulated a net worth of up to $80 trillion, benefiting from rising interest rates as wealth begins to shift to the millennial generation.

Therefore, Bank of America Merrill Lynch expressed a more positive view on cyclical stocks, upgraded the communication services industry to overweight, and downgraded the information technology industry to underweight. It remains optimistic about the US technology and TMT sectors.

Basic assumption: The US economy can still achieve a soft landing

Bank of America Merrill Lynch reiterated its expectation that the US economy will achieve a soft landing next year, but the growth rate will be significantly lower than trend growth. Bank of America Merrill Lynch made the following adjustments to its forecast:

Taking into account the rise in long-term interest rates, Bank of America Merrill Lynch lowered the growth rate for Q1 2024 from 1.0% to 0.5%, and the growth rate for Q4 will decrease by one-tenth to 0.6%. The US economy will experience a longer and deeper period of weakness, mainly due to the impact of credit tightening on interest rate-sensitive factors.

Bank of America Merrill Lynch predicts that by the middle of next year, the performance of non-consumer industries will be weaker than that of consumer industries, with a second bottom in residential investment in the first half of the year. As the manufacturing sector's structural growth driven by fiscal policy this year recedes, structural investment will also turn negative.

It is worth noting that this year's "Black Friday" released a positive signal for consumer spending.

Aggregate data from BAC credit and debit cards shows that on "Black Friday" (November 24th) this year, household card spending (HH) increased by 2.3% compared to the same day last year. And during the holiday week ending on November 25th, card spending increased by 1.7%, higher than the week after last year's "Black Friday". The corresponding increase in holiday-related products (with at least 20% of expenditures occurring in November and December each year) may be even greater.