Thomson Reuters
- The S&P 500 looks ripe for a 6% decline from current levels by the end of 2021, Bank of America said Wednesday.
- Corporate profit margins and growth are vulnerable to rising costs and supply chain problems.
- The Fed's asset purchases – a major pillar of support for the equity market – are set to start winding down.
- See more stories on Insider's business page.
The S&P 500 index has jumped by 20% in 2021, with the run-up largely carried by a surge in corporate profit growth, but pressure on margins from rising costs are likely to contribute to a 6% pullback in the benchmark by year's end, Bank of America said Wednesday.
Equity strategists led by Savita Subramanian sounded their cautious view even as they moved up their year-end target to 4,250 after the S&P 500's rally has blown through the investment bank's previous target of 3,800.
The outlook of a 6% decline on the benchmark would be from Tuesday's close of 4,520.03.
"Marking S&P target to 4250, but what good news is left?," wrote Subramanian. "Sentiment is all but euphoric with our Sell Side Indicator closer to a sell signal than at any point since 2007. Wage/input cost inflation and supply chain shifts are starting to weigh on margins," she wrote.
Meanwhile, the Federal Reserve is preparing to pare back its purchases of Treasury bonds and mortgage-backed securities as the economy returns to growth following the pandemic-led recession. Asset tapering has been a pillar of support for the equity market as the expansion of the Fed's balance sheet has driven more than 50% of its returns since the global financial crisis, said BofA.
"If taper means no upside to the S&P 500, [interest rate] tightening would be worse," the strategists said and noted other signs of concern including widening credit spreads.
The central bank has been buying $80 billion worth of Treasury securities and $40 billion in mortgage-backed securities, or MBS, every month since June 2020.
BofA on Wednesday also established its 2022 year-end target for the S&P 500 at 4,600, representing just 2% upside from current levels.