Bank of America Updates S&P 500 Targets, Foresees 33% Earnings Growth by 2026

Strategist Savita Subramanian stated in a recent note that investors might find a more favorable entry point following a market pullback. Notably, US equities have seen only one correction of at least 5% this year, which occurred in March, contrasting with the average of three corrections per year. Approximately half of the bank's indicators for a bear market have also been activated.

BofA has identified several risks to its forecast, including inflation, the Federal Reserve's interest rate policy, the quality of corporate earnings, and credit conditions. Subramanian pointed out a disparity between current equity valuations and the bank's inflation expectations, explaining that the market's price-to-earnings multiple suggests significantly lower inflation than what BofA predicts. A historical comparison was made with the 1970s, a period marked by inflation risks, a declining US dollar, and Federal Reserve interest rate hikes, which led to a stock market decline exceeding 40%.

In regard to the upcoming US midterm elections, Subramanian minimized the impact of a potential Democratic majority on capital spending, noting that state governments are primarily directing investment in artificial intelligence infrastructure. Despite short-term concerns, her long-term outlook for equities remains optimistic, supported by expectations of companies achieving productivity gains through scalable business processes.

BofA anticipates S&P 500 earnings growth of 33% in 2026 and 12% in 2027, although the bank’s index targets imply that these higher earnings may not lead to proportional increases in share prices during the forecast period. The bank favors large-cap value stocks, select small- and mid-cap opportunities, and the equal-weighted S&P 500 over the market-capitalization-weighted benchmark, reflecting expectations of a near-term pullback followed by limited gains in the next year alongside ongoing earnings expansion.