Analysts are pessimistic about long-term growth? Bank of America: This is a bullish signal

The rally in the S & P 500 has stalled since August, but despite the slowdown, the stock market is not looking cheap at all.

"In terms of market capitalization-weighted valuations, it is almost impossible to be bullish on the S & P 500, with 19 of the 20 metrics we track indicating overvaluation," Jill Carey Hall, an equity and quantitative analyst at Bank of America, wrote in a recent note to clients. "The equity risk premium derived from our dividend discount model is the only indicator that U.S. markets are still trading cheaply, consistent with our view thatThe risk premium for stocks may be too high, and the interest rate on so-called'risk-free '10-year Treasuries may be too low。”

Industrial foreign exchangeWrite,Although valuation is important in the long run, market sentiment has a more direct impact on stock pricesIronically, while market sentiment seems to be turning bearish right now, that's exactly why stocks could rise sharply next year

Could the S & P 500 index rise by more than 25% next year?

Although market capitalization-weighted valuations may not seem cheap, theyEqual-weight valuations are actually not that badEspecially when you take out the so-called Magnificent 7, which has significantly outperformed other markets this year.

"Based on equal weights, the price-to-earnings ratio is roughly at its historical average," notes Carey Hall. In fact, she notes, the S & P 500 is only three standard deviations above its average when measuring the dynamic share price-earnings ratio (PEG).

The reason is investor pessimism, especially with regard to long-term growth expectationsCarey Hall wrote that since 202,Analysts' consensus on long-term growth (LTG) has fallen sharply and is currently near historic lowsThis is only a few percentage points higher than the March 2020 low.

But...Lower long-term earnings expectations have historically been a strong indicator of positive future stock market returns.

“In the past, low LTG was bullish for the marketIn fact, in November 2021, given the strong inverse relationship between LTG and future S & P 500 returns, we are taking overly high expectations as a bearish signal. Today's LTG suggests that, all else being equal, the S & P 500 will have a price return of more than 25% over the next 12 months. "

Bank of America: Optimistic about these 6 industries

So if the stock market can indeed rise by more than 25% next year, where should investors put their money now to maximize returns?

Carey Hall pointed out that considering that rising interest rates are usually a problem for long-term industries,The long-term earnings expectations for the communications services industry are surprisingly highAt the same time, she wrote, expectations for the energy industry are surprisingly low, considering that earnings have grown by 40% over the past three years.

Overall, Carey Hall and her colleagues believe that the outlook for six industries is promising based on three factors: price momentum, earnings momentum, and valuation.

According to Carey Hall,The best investment opportunities are in the interactive media and services, household durable goods, media, passenger aviation, energy equipment, services, and insurance industries.

More generally, she pointed out that the most attractive industries currently areCommunication services, energy, and consumer discretionary industries.