Strong economic growth and an even better earnings season than projected has Bank of America-Merrill Lynch raising its view on the stock market's prospects.
The Standard & Poor's 500 will reach 1300 by the end of 2010 and 1350 a year from now, BofA-Merrill Global Research said in a note to clients. The projection represents a 7 percent increase from current levels to year's end and is 25 points higher than the firm's original estimate.
"The mounting evidence of the economy recovering is shedding more light on hte S&P 500 EPS outlook," chief US equity strategist David Bianco wrote. "As growth gains momentum, we think it's appropriate to put less weight on the more extreme downside scenarios."
In conjuction with its raise on the index the firm said S&P earnings per share would grow to $80 for 2010 and $88 and $94 in the next two years, respectively from $75, $85 and $90. The S&P's targeted price-to-earnings ratio stays at 15.
Growth would come from consumers because both businesses and individuals overreated to the financial crisis and anticipated a deeper downturn than what actually materialized.
"S&P 500 sales should rebound further as many healthy US households and businesses return to more normal behavior," Biano said.
The forecast is based on long-term Treasury rates staying below 5 percent through 2011, while a sub-4 percent 10-year note would allow stocks to "grind higher" during the summer, Biano said.