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Bank of America Sees Negative 10-Year Stock Returns

BofA's price-to-normalized earnings ratio indicates a negative 10-year return for the S&P 500 for the first time since 1999.
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Bank of America’s long-term stock valuation model, using a price-to-normalized earnings ratio, indicates a negative 10-year return for the S&P 500 for the first time since 1999.

“Price-to-normalized earnings has a very strong relationship to subsequent S&P 500 returns over the long haul,” BofA analysts, led by Savita Subramanian, wrote in a commentary Tuesday.

“The S&P 500’s current trailing normalized PE ratio suggest a 10-year, annual 12-month price return of negative 0.5%, representing the first negative returns since the tech bubble.”

Valuation is extremely important, the BofA analysts said, representing “almost all that matters for long-term stock returns.”

Further, “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,” they said.

In the report, BofA also reiterated its forecast that the S&P 500 will end the year at 4,250. It recently stood at 4,594, up 0.6%, and has soared 22% year to date on strong earnings.

BofA’s forecast represents a 7% drop from the recent level.

“We see more downside risk to the S&P 500 through year-end amid extended valuations, near-euphoric sentiment and peak margin risk, as supply chain, labor inflation, potential tax hikes, the energy crisis, China GDP risks and peak globalization all pose headwinds,” the analysts said.

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The S&P 500 forward PE ratio stood at 21 Friday, well above the five-year average of 18.3 and the 10-year average of 16.4, according to FactSet.