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.
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.