Stocks to Hit Record High Next Year—Eventually: Pro

Wall Street is already beginning to look ahead to next year.

A tour bus passes the Wall Street bull in the financial district January 22, 2007 in New York City.
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A tour bus passes the Wall Street bull in the financial district January 22, 2007 in New York City.

In one of the first market forecasts for 2013, Bank of America Merrill Lynch’s chief U.S. equity strategist sees stocks having a bumpy ride next year before ending with the S&P 500 up 10 percent to an all-time high.

“Although there may be more can-kicking by policymakers, some uncertainty is likely to be removed by the end of next year,” said Savita Subramanian in the note to clients Friday. “Given our house view that the U.S. avoids a recession and that GDP growth modestly accelerates into next year, we assume steady mid-single digit earnings growth this year and next, with a slight pick-up in 2013.”

The S&P 500surged this week to its highest since the breakout of the housing crisis in 2007. The benchmark jumped after Federal Reserve Chairman Ben Bernanke surprised even the biggest bulls with an open-ended program to purchase mortgage-back securities — the so-called QE3.

(Related: Read The Federal Reserve Statement Here.)

But Subramanian doesn’t see a straight line to her 2013 S&P 500 target of 1,600. Rather, the strategist is standing by her prediction that the S&P 500 eventually pulls back before the end of this year to 1,450.

“We see an unusually high number of macro risks in the upcoming months that should cap upside or even trigger a correction,” said Subramanian. “Economic growth could disappoint in the second half and early next year, as uncertainty weighs on business and consumer spending in anticipation of the fiscal cliff.”

But after Congress eventually tackles the hard decisions needed to avoid the fiscal cliff, and as tensions calm in the Middle East and Europe muddles through a recession, Subramanian sees a stock market next year driven by pure fundamentals.

As these uncertainties lift, she predicts an expansion in the market’s multiple and S&P 500 earnings to grow by about seven percent, getting her to the 1,600 target. The S&P 500’s previous record close was 1,565, reached in October 2007.

“I think it's a definite possibility that stocks make new highs in 2013,” said Jim Iuorio of TJM Institutional Services, in reaction to the Bank of America report. “The most important thing to remember is that there is tremendous cash on the sidelines and current Fed policies aim to make that a very uncomfortable position.”

Subramanian is among the first of her Wall Street peers to put out full reports on 2013. Ironically, she thinks the current bearishness of her fellow strategists is another reason to be optimistic about next year, because their upcoming outlooks may reflect a change of heart.

“Wall Street’s consensus equity allocation has been a reliable contrary indicator over time,” states the report. “In other words, it has been a bullish signal when Wall Street strategists were extremely bearish, and vice versa.”

Currently, Wall Street strategists recommending putting just 44 percent of one’s portfolio in equities, which is near a 27-year low, according to Bank of America data.

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