10 Reasons Bank of America Merrill Lynch is Bullish on the S&P 500!

[ 0 ] March 3, 2015 |

March 2, 2015, 12:46 P.M. ET
10 Reasons Bank of America Merrill Lynch is Bullish on the S&P 500
By Chris Dieterich

Lots of investors likely are dealing with a nagging, cautious feeling about the U.S. stock market as major indexes continue to thunder higher. Stocks can’t go up forever, right?


In just one week, the bull-market rally for the S&P 500 will celebrate its sixth birthday from its post-financial crisis nadir. That’s a rare feat. Only three other bull markets have lived to see a seventh year since the World War II, and this one is pacing to be the largest by magnitude (211%), says S&P Capital IQ.

Don’t overthink it, says Savita Subramanian, equity and quantitative strategist at Bank of America Merrill Lynch. She offers up 10 reasons to stick with index funds like the SPDR S&P 500 (SPY) and the iShares Core S&P 500 (IVV):

1) Sentiment is far from euphoric. “Wall Street sentiment is at bearish extremes, with strategists recommending just a 52% stock allocation. When strategists have been as or more bearish in the past, the S&P 500 has gone up over the next 12 months 98% of the time, with avg. returns of 27%.”

2) Fund managers are close to 5% cash. “BofAML’s latest Global Fund Manager Survey suggests cash balances remain high
at 4.7%, still in “buy” territory and represent money waiting to be put to use.”

3) The Great Rotation hasn’t happened yet. “Since 2009, equities have seen less than $500bn in inflows, compared to over $900bn for bonds. The Great Rotation out of bonds into stocks has more to go.”

4) S&P is 60% less levered than at prior market peaks. “The S&P 500 has cut its leverage ratio to just above a third of its ‘00 and ‘07 levels.”

5) US corporates are awash in cash. “Unlike the US government or consumer, US corporates have delevered and are
flush with cash.”

6) Best income growth story around. “Nearly half of the S&P 500 pays a dividend yield above the 10-year Treasury yield, close to its 3-decade high, and the S&P 500 payout ratio sits near century lows.”

7) Valuations aren’t stretched. “The S&P is trading above average on P/E, which concerns investors. But on Price to Free Cash Flow, Price to Normalized Earnings—a more predictive valuation metric—and EV/EBITDA, the S&P 500 still looks attractive.”

8) US is the biggest innovator…and innovation adds alpha. “US R&D to GDP has been rising over time, and the US spends more on R&D than any other country including China. And R&D spenders typically outperform.”

9) Best-in-breed equity index. “US stocks trade at about a 10% premium to global equities, but in our view that premium
is warranted: the US has a higher ROE, lower beta, and has a significantly higher proportion of “B+ or Better” ranked stocks (stable earners) than global benchmarks.”

10) Lower oil and Global QE bode well for future earnings. “If lower oil prices and further easing from global central banks can stimulate global growth and reduce the risk of a global slowdown, we believe this is likely to more than offset much of the short-term hit to Energy profits.”


Category: Markets and Trading