Bank of America sees just an average market gain next year because a vaccine is mostly 'priced in'

Published Tue, Nov 24 20208:34 AM ESTUpdated Tue, Nov 24 202010:13 AM EST

(This story is for CNBC Pro subscribers only.) Bank of America sees modest gains in U.S. stocks next year as the major averages already have a successful Covid-19 vaccine and economic recovery mostly baked in. The Wall Street firm's 2021 year-end price target for the S & P 500 is 3,800, implying about 6% upside from current levels. "The recovery is intact and the world likely re-opens in the 2H, but a lot of optimism is priced in already on vaccine/recovery," Bank of America equity and quant strategist Savita Subramanian told clients. Stocks have experienced a wild 2020 due to the economic impact from the coronavirus pandemic. After experiencing the fastest bear market in history in the first quarter, equities started their swift rebound off the March bottom, supported by historic monetary and fiscal stimulus. Positive coronavirus vaccine news has also driven stocks higher recently as investors cheer the possibility that the economy can return to normal. Strong vaccines trials from Pfizer, Moderna and AstraZeneca have lifted markets in recent weeks. However, Bank of America sees stocks falling before they rise to their 2021 year-end level, due to the surge in Covid-19 cases across the country. "Optimism around vaccine news is likely driving the market to fresh highs despite new COVID-19 cases continuing to rise and fiscal stimulus remaining fraught," said Subramanian. Bank of America is also on the bearish side of earnings estimates for next year based on weaker first half of the year expectations. The firm expects S & P 500 earnings to reach $165 per share, while consensus sits around $168 per share. "But history suggests earnings cycles are asymmetric — recoveries are typically stronger than downturns," said Subramanian. "And positive vaccine news points to a robust 2H recovery." "Cyclical sectors should drive the bulk of [year-over-year] growth, but not all industries need to fully recover for earnings to exceed pre-COVID levels, given the composition of index," she added. Heading into 2021, Bank of America is calling for value stocks to outperform growth stocks, with a bias toward financials and energy, two of the worst-performing sectors this year. The firm is also skewed toward cyclicals over defensives and small caps over large caps. "Value is supported by positive vaccine news plus a host of compelling reasons including the profits cycle, the economic cycle, investor positioning, our [dividend discount model] framework, lessons from Japan, and the fact that value stocks are the new growth stocks," said Subramanian. Bank of America is also overweight the health-care sector, with a Biden win and spilt Congress driving the stocks higher. The firm's forecast is among the more tepid than others on Wall Street. For example, BMO Capital Markets said last week it expects the S & P 500 to reach 4,200 by the end of 2021, which implies a 17% rally from current levels. — with reporting from CNBC's Michael Bloom.

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(This story is for CNBC Pro subscribers only.)

Bank of America sees modest gains in U.S. stocks next year as the major averages already have a successful Covid-19 vaccine and economic recovery mostly baked in.

The Wall Street firm's 2021 year-end price target for the S&P 500 is 3,800, implying about 6% upside from current levels.