Bank of America Says Warning Sign Shows 20% Drop
- Bank of America strategist Savita Subramanian has a bleak outlook for stocks going forward.
- She said in a recent note that data indicates the S&P 500 may fall 20% over the next 12 months.
- Many stock valuation measures are currently extended by historical standards.
The landscape of stock valuation measures don’t paint a pretty picture of what’s to come in the market.
In a November 15 note to clients, Bank of America shared that 15 of their 20 market valuation measures are historically high.
Some of the most egregious offenders, all currently registering at least two standard deviations above their historical averages, include:
- Schiller price-to-earnings ratio (3 standard deviations above historical average)
- Price-to-book value (2.3)
- Enterprise value-to-earnings before interest, taxes, depreciation, and amortization (2.2)
- Price-to-operating cash flow (2.6)
- Enterprise value-to-sales (2.5)
- S&P 500 market cap-to-GDP (3.4)
Forward-looking investors have bid up valuations in a hyper-liquid market on the expectation that long-term growth earnings growth will be stellar. Such a scenario would bring valuations back down to norms without causing a sell-off. The impressive earnings would eventually add up to justify current share prices in the market.
But that’s not the scenario that strategists at Bank of America led by Savita Subramanian see playing out. Instead, they believe investors’ expectations for future growth are too high. Right now, expectations are above those seen during the dot-com bubble.
Bank of America
But high expectations have historically come with disappointing results. According to Bank of America’s measures, the correlation between future growth expectations and actual S&P 500 returns show that stocks would be due to drop 20% over the next 12 months.
Bank of America
“LTG rates are better contrary than positive indicators, like most sentiment measures,” Subramanian said in the note. “In fact, only…