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The Tell: Bank of America slashes S&P 500 target to ‘lowest on the Street’ after recession forecast

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Bank of America has lowered its 2022 target for the S&P 500 by 900 points, to 3,600, citing its forecast for a recession this year and expectations for a Federal Reserve “pivot” in 2023.

The new year-end target is “the lowest on the Street,” said equity and quant strategists at Bank of America in a BofA Global Research report Thursday. BofA now forecasts a “mild” U.S. recession starting in the second half of 2022, they said. 

Other big Wall Street banks have also recently lowered their estimates for the S&P 500 after the stock market was badly bruised in the first half of 2022. 

Credit Suisse earlier this month cut its target for the U.S. benchmark to 4,300. And in late June, Citigroup analysts lowered their S&P 500 forecast to 4,200, a revision they said was determined by blending “soft landing” and recession scenarios as the Federal Reserve aggressively raises interest rates to fight high inflation. 

The S&P 500
SPX,
-0.30%

has tumbled about 20.5% this year after closing 0.3% lower Thursday at 3,790.38. The index fell for a fifth straight day Thursday, its longest losing streak since June 14, according to Dow Jones Market Data.  

A hotter-than-expected inflation report earlier this week sparked investor worries that the Fed will continue on its hawkish path of large rate increases, potentially causing a recession. 

The BofA strategists said they expect the central bank will pause in the first half of 2023 and begin cutting rates in the second half of 2023. “The Fed is forecast to hike to 3.25%-3.5% by year-end,” they wrote. 

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The strategists also said BofA now anticipates that the 10-year Treasury yield will fall to 2.75% by the end of 2022, compared with a prior forecast of 3.5%. 

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.964%

rose 5.3 basis points Thursday to 2.957%, snapping a three-day losing streak, according to Dow Jones Market Data. 

“No two recessions are alike,” the BofA strategists wrote. “The market typically leads the economy, peaking before recessions begin and troughing before recessions end. But it occasionally lags (e.g. 1980).”

The S&P 500 ended Thursday 3.37% above its 52-week low of 3,666.77 on June 16, according to Dow Jones Market Data. 

The BofA strategists have revised their outlook for the S&P 500’s earnings per share this year to $218, down from $221, according to their report. They lowered their 2023 EPS forecast to $200 from $230.

Their “worst case” scenario for the S&P 500 this year remains at 3,000-3,200, the report shows.

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