Bank of America Merrill Lynch on Monday reduced its 2015 price target for the S&P 500 stock index by 5 percent as emerging markets threaten global economic growth.
The bank cut its year-end target to 2,100 from 2,200 after stocks last month fell into correction territory, or by more than 10 percent from all-time highs. To reach that goal, the index needs to rise about 9.3 percent from the Sept. 4 closing price of 1,921.
“The key question for equities is whether the softness in emerging-market growth will worsen and impinge developed market growth,” Savita Subramanian, head equity and quant strategist at BofAML, said in a Sept. 8 report
obtained by Newsmax Finance. “So far, DM growth has been resilient in the face of the EM slowdown, with our economists forecasting near 3 percent GDP growth in the U.S.”
China’s emerging economy has vaulted into the world’s second largest behind the United States with yearly gross domestic product of about $10 trillion. The Asian country this week revised its estimate
of 2014 growth to 7.3 percent from 7.4 percent, the weakest in a quarter century, as services industries didn't expand as much as forecast.
That slower growth rate is affecting countries that supply China with raw materials, including Brazil, Australia and oil producers. The price of West Texas Intermediate crude collapsed about 60 percent from its 2014 high to less than $40 a barrel in August.
“Policy stimulus and some recovery in commodity prices could help to stabilize and boost EM growth into year-end,” Subramanian said. “And just as selloffs can be fast and furious, so too can the rebounds.”
The bank relied on several forecasting frameworks to devise its year-end target for stocks. Those financial models look at company fundamentals, investor sentiment and technical indicators.
BofAML said higher-quality stocks are a good bet for investors seeking gains during periods of higher market volatility and slower economic growth. Those quality companies tend to be bigger corporations with a history of stable earnings, such as in the health care and consumer staples industries.
“Not only has high quality historically been the best hedge against rising volatility, but higher quality stocks are undervalued and underowned,” according to the bank. “And what happens if the Fed tightens too much and we enter a recession? Quality has historically outperformed during profits slowdowns and bear markets.”
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