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Bank of America analyst looks 10 years ahead

Bank of America Merrill Lynch analyst Savita Subramanian has a crystal ball with a 10-year window on it, and she likes what she sees.

How much so? Enough that she thinks the S&P 500 stock market benchmark is likely on a journey to 3,500, where it will stand precisely at Dec. 31, 2026.

OK, sure: Subramanian issued the forecast with at least a little bit of a wink and a nudge during a media briefing Tuesday on the firm's 2016 outlook. Calling exact price targets in any part of the market is generally a fool's errand, the most recent exhibit being all the firms on Wall Street, BofAML included, that had to reduce their price targets for what has been a lackluster 2015.

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But at least in a directional sense, she believes the market, despite a flat performance this year, will bounce back in the year ahead and produce reliable returns for most of the next decade.

"Stocks still look like the best game in town," said Subramanian, the head of U.S. equity and quantitative strategy at BofAML, consistently rated one of the most accurate global and U.S. forecasting firms on Wall Street even with the dose of over-enthusiasm in 2015.

"This was one of the toughest years to call the market," she said. "On a relative basis, the S&P 500 is going to be a good place to be in 2016."

The firm isn't calling for gangbuster growth, but sees the index hitting 2,200 by the end of the year, implying about 7 percent upside from the current level and matching what initially had been BofAML's call for 2015 before it was reduced to 2,100. The years ahead look similar. Downside risks include further strengthening in the U.S. dollar and more trouble from oil, though Subramanian said the forecast is for energy prices to stabilize.

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Over the next decade, Subramanian expects the S&P 500 to register annual gains in the 4 percent to 12 percent range. That's a far cry from some of the raging bull years since the market lows of March 2009, but it is still forecast to beat out any other asset class.

BofAML peers into 2016

Asset category
Expected return
Japan stocks 11-16%
U.S. stocks 6-8%
Global stocks 4-7%
U.S. dollar 4-6%
U.S. Inv. Grade bonds 3-4%
Emerging Mkts Corp debt 2.5-3.5%
European stocks 0-5%
U.S. house prices 2%
Cash 0-1%
U.S. High Yield bonds -3%
Commodities Minus 3 to 0%
Em Stocks -4%
30-yr Treasury -5%
Source: BofA Merrill Lynch Global Investment Strategy

Those gains likely will come against a backdrop of the steady but unspectacular growth the U.S. has seen since the Great Recession officially ended in mid-2009, according to BofAML's economic team.

The next two years are expected to see gross domestic product increase 2.4 percent and 2.1 percent respectively. Ethan Harris, the co-head of global economics research, said he expects the economy to avoid recession, which is counter to several other calls on Wall Street, particularly from Citigroup, which sees a 65 percent risk of recession in 2016.

"We're at escape velocity, but it turns out escape velocity is not that high," Harris said.

"We're getting there," added Michelle Meyer, the firm's deputy head of U.S. economics.

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For investors, the game is about to change, Subramanian said.

In a tightening market, the temptation might be to look for sectors. Instead, she said, search for themes — three, to be specific.

Skyline of midtown Manhattan with Bank of America Tower in the background from Bryant Park.
Bruce Yuanyue Bi | Getty Images
Skyline of midtown Manhattan with Bank of America Tower in the background from Bryant Park.

"Every sector has hair on it, and there's really no compelling sector bet you can make in 2016," she said.

The themes run counter to much of what has been happening in the market and entail liquidity over leverage, high quality over low, and value over growth.

For much of the past 15 years, the biggest gains have come from companies with high debt levels, using leverage to amplify gains and keeping cash on the sidelines. That is changing, Subramanian said, as cost of capital rises and investors rein in risk.

Underpinning the broader market will be investor skepticism that remains high despite a bull market that is on its way to being the second longest in history.

"This has literally been the most hated bull market that we've seen," Subramanian said. "Bull markets end in euphoria."