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Net Net: Promoting innovation and managing change

Bank of America slashes outlook for S&P 500

BofA's Subramanian: More importantly than the Fed...

Amid a market reeling from tightening financial conditions, Bank of America Merrill Lynch has dimmed its hopes for the stock market this year.

The influential Wall Street firm on Friday cut its full-year forecast from 2,200 to 2,000, citing a declining outlook for growth as well as a sapping of market liquidity. Morevoer, the firm, led by equity and quant strategist Savita Subramanian, warned of "significant near-term downside to current levels."

About the only good news from the change is that the forecast sees substantial upside from the current level — about 8 percent from the level where the index traded during Friday's relief rally. The full-year return, accounting for the plunge so far, would be 2.1 percent should BofA hit its target.

"Risks have increased," Subramanian said in a note to clients. "While this (forecast revision) still implies attractive upside to U.S. stocks through year-end, unless we see signs of a growth recovery, there may be significant near-term downside to current levels."

Contributing to bearish indicators in the firm's current modeling is "management guidance that has grown increasingly pessimistic; and the percentage of stocks with forecast losses is at levels that preceded the last two bear markets."

The forecast comes with the S&P 500 down more than 9 percent year to date and three sectors — financials, energy and materials — seeing bear market declines of more than 20 percent from their 52-week highs. Only two sectors — telecom and utilities — are positive for the year.

Stocks rallied Friday in part on a sharp jump in oil prices.

Subramanian said the firm's long-term forecast remains optimistic and unchanged; BofAML has a 10-year price target for the S&P 500 of 3,500. However, she noted that in an extreme scenario where the equity risk premium would revert to February 2009 levels — just before the last bear market bottomed and the protracted bull run began — that would take the index down to 1,150, a 38 percent decline from current levels.