“The stock market has always seen outsized returns leading up to its eventual crash, and we think this time will be no exception.” –Savita Subramanian, Bank of America Equity Strategist
As volatile as global governments seem to be at the moment, one thing remains consistent: the stock market is climbing. Across the board last week, analysts began raising their yearly targets for the S&P 500 Index. However, what goes up must come down. Many financial experts agree that the stocks are overvalued, and a stock market crash is on the horizon.
Bull Market’s Final Rally
Bank of America increased their 2017 year-end estimate from 2,300 to 2,450 based on the market’s performance since December. Equity strategist Savita Subramanian leads Bank of America’s U.S. team. “We raise our 2017 year-end target to 2,450 to reflect increasing likelihood we are entering a typical end-of-bull-market rally,” Subramanian states in a note acquired by Bloomberg. “The stock market has always seen outsized returns leading up to its eventual crash, and we think this time will be no exception.”
Regarding this current trend of overconfident investors, Julie Verhage and Sid Verma of Bloomberg.com believe that it is setting stocks up to “race past fair value.” They have gathered compelling evidence to support this hypothesis, including Bank of America’s sell side indicator chart, which is “a contrarian measure of bullishness on Wall Street.” The data “places the odds of a rally in the S&P 500 at nearly 100 percent, perhaps to the tune of a 22 percent surge over the next year.”
Subramanian references this chart in the note when stating that “Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 94 percent of the time, with median 12-month returns of 22 percent.”
Stock Market Overvalued
The near certainty of this data has strategists everywhere increasing their targets for the S&P 500 Index, which is traditionally used as an indicator of the market as a whole.
Bank of America does not mince words when discussing what these types of overvaluations could mean for the market. Verhage and Verma summarize the stance of Bank of America strategists: “High valuations, elevated corporate leverage, rising inflows into equity funds, a lower equity risk premium, and U.S. policy uncertainty all set the stage for potential volatility in the asset class over spring and summer.” In other words, investors may want to rethink their view of the stock market and to make sure their portfolios remain diversified to reduce risk.
Portfolio Diversification
Traditionally seen as a safe haven investment, gold can balance a portfolio in order to protect against volatility in the market. It is also worth noting that when stocks seem to be overvalued, gold tends to be undervalued, presenting a great buying opportunity.
Subramanian and the team at Bank of America agree. “There is a wide and binary range of outcomes, and we think investors are better served thinking about the risk-reward of stocks rather than an absolute target.”