Bank of America sees downside risk to the market into year-end for a litany of reasons

Published Tue, Oct 26 20218:54 AM EDTUpdated Tue, Oct 26 20214:26 PM EDT

The S & P 500 rose to a another record Monday, but Bank of America said it could still see a substantial drop by the end of the year. "We see more downside risk to the S & P 500 through year-end," Savita Subramanian, head of U.S. equity & quantitative strategy at Bank of America, wrote Tuesday in a note. The bank maintained its year-end target of 4,250 on the broad market index, which is almost 7% below where it closed Monday. Bank of America justified its bearish S & P 500 target with three points: Extended valuations "Near euphoric sentiment" Peak margin risk due to headwinds from supply chain disruptions, labor inflation, potential tax hikes, the energy crisis, China GDP risks and peak globalization. The bank added the benchmark may continue to struggle next year for those reasons. Its 4,600 target on the S & P 500 for 2022 is about where the index is now. "Fed liquidity has explained the bulk of market returns post-global financial crisis, and BofA's tapering forecast would indicate a flat market through 2022 year-end," the note said. That warning comes during the biggest week of the earnings season, in which the majority of companies that have reported have beaten analyst expectations. Those strong earnings have overshadowed concerns about rising inflation, lingering Covid cases and a Federal Reserve seeking to remove stimulus soon. What investors should do If markets turn south, that means dividends are becoming even more important, according to Bank of America's note, and investors should focus specifically on dividend growers, where the company raises the dividend from year to year. "We see dividend preservation and growth as the single most important criteria for stock selection, which could potentially be the difference between a flat-to-negative and positive return over the next 10 years in the S & P 500," the firm said. Among the popular ETFs that track dividend growers are the Vanguard Dividend Appreciation fund and the iShares Cored Dividend Growth ETF .

Traders work on the floor of the New York Stock Exchange.

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The S&P 500 rose to a another record Monday, but Bank of America said it could still see a substantial drop by the end of the year.