Bank of America released a research note, calling for a 6,666 year-end target for the S&P 500 (IVV) next year (2025). This implies a nearly 10.5% gain from here. Is this target too optimistic?
The widely-held index would benefit from strong economic growth, which would lift the profits of the underlying firm. BofA thinks that GDP-sensitive companies would help the financial (XLF) sector, consumer discretionary (XLY), real estate (XLRE), Utilities (XLU), and Materials (XLB). This bullish view is not risk-free. Globally, economic growth may lag as the U.S. enters a trade war with its partners.
If countries impose tariffs against each other, the financial sector would pull back. Already, JP Morgan (JPM), B of A, Citigroup (C), and Wells Fargo (WFC) are trading their all-time highs. The materials sector would perform poorly if the economy weakened. In addition, raw material prices would fall, hurting profits.
The real estate sector is more likely to trade in a range. The Federal Reserve might slow the pace of its interest rate cutting. Currently, W.P. Carey is trading nearly 17% below its 52-week high while Realty Income (O) is trading in a range of between $50 – $60.
Your Takeaway
Investors should consider trimming their position in the S&P 500. The index gained 27% YTD. This pre-emptive sale would allow investors to add back to their allocation at lower prices.