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BofA’s Subramanian Likens S&P 500 to 36-Year, Zero-Coupon Bond

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(Bloomberg) -- When Bank of America Corp.’s Savita Subramanian raised her outlook for the S&P 500 Index this week, some stock bulls may have seen capitulation by a bear. But as she made clear on Thursday, the market remains vulnerable, particularly to any increase to companies’ cost of capital.

“The S&P 500 has essentially turned into a 36-year, zero-coupon bond,” BofA’s head of U.S. equity and quantitative strategy said in an interview on Bloomberg TV’s Surveillance. “If you look at the duration of the market today, it’s basically longer duration than it’s ever been. This is what scares me.”

The threat is that “any move higher in the cost of capital via interest rates, credit spreads, equity risk premia, that’s basically going to be a huge knock on the market relative to the sensitivity we’ve seen in the past,” she said.

In a note to clients, Subramanian raised her forecast for the S&P 500 to 4,250 at year end from 3,800 and gave a target for next year -- 4,600 -- that represents only a 2% gain. In the interview Thursday, she pointed to “much better than expected” earnings as helping to drive stock values to record highs, with the S&P gauge currently above 4,500.

But the pace of earnings growth is at risk from inflation and supply chain disruptions. Subramanian said that the so-called guidance ratio, a measure of whether companies are guiding above or below consensus earnings estimates, is dropping.

“Over the last four weeks, we have seen that guidance ratio move from record high to a big southward move,” she said. “We’re starting to see companies warn on profits and it’s showing up in a broader way across the S&P 500.”

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