In the latest sellside attempt to promote skepticism about the "market" (which in the case of the US has supposedly not been nationalized just yet, unlike in Japan), BofA's Savita Subramanian - who still has a 2,000 S&P year end target - has issued a report titled "Exploring the Dark Side" and subtitled "Charts that keep the bulls up at night" in which the equity strategist says that as the market grinds higher (and earlier today hit fresh record highs) "we continue to see elevated risk of correction."
She adds that "a picture is worth a thousand words, so inside this report we include four pages of charts that illustrate some of our concerns:"
- Valuations: US stocks look expensive vs. history on most metrics, although we recognize that valuation is not a great timing indicator.
- Positioning: Investors aren’t as bearishly positioned as they may seem.
- Expectations: High expectations for fiscal stimulus and growth appear ripe for disappointment.
- Economic surprises: Economic surprises have waned since late July.
- Growth: Outside of the benefits from the oil rally and weaker dollar, underlying sales growth is at a three-year low.
- China: Recent data have been pointing to a slowdown and expectations for stimulus may disappoint.
- Credit and leverage: Leverage is high and credit is slowly tightening, while appetite for equity issuance may also be drying up.
- Elections: This year’s presidential election could come with an uncertainty shock and a slowdown in business investment.
- The Fed: BofAML interest rate forecasts imply a far more aggressive pace of Fed tightening than is currently priced into the market.
- Seasonality: September is seasonally the weakest month of the year, in which the S&P 500 has historically been down 56% of the time since 1928.
And here are the charts (and one table), as well as running commentary from BofA:
The S&P 500 looks expensive vs. history on most valuation metrics.
Admittedly, valuation is not a great timing indicator. But we see elevated risk of a correction in the coming months based on a multitude of other factors.
Positioning should be less of a driver of market upside here as a result of plunging short interest. While this may not be an outright bearish signal for equity markets, it does suggest that the market may be more vulnerable to volatility spikes.