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The volatility for 2020 saw the S&P 500 Index adding 16.3% to 3,756. Economists at the Bank of America Merrill Lynch lays out three scenarios for the S&P500 through 2022 with the index trading around the 3,800 level in the base case and surging as high as 4,400 in the most optimistic view.  

Key quotes

“Base case: The central tendency of the S&P 500 is currently around the 3,800 levels. This assumes the current consensus 2022 EPS estimate of $200 and a forward multiple of 19x. We assume a rise in global growth as we move through 2021, vaccine deployment leads to the pandemic becoming less relevant in the second half of 2021 and interest rates likely moving higher moderately.”

“Upside scenario: It is likely that earnings estimates will move further higher for 2021 & 2022 as profit margins move back up toward pre-pandemic levels, nominal growth improves and USD weakens. This could push the central tendency for S&P 500 toward the 4,000 range as earnings estimates move higher. In a more optimistic scenario, if multiples also expand (fund flows pick up more sustainably into equities, scarcity premium for stocks rises due to lack of yield and growth in other asset classes, sentiment moves higher into more optimistic levels) then a range of 4,200-4,400 is likely achievable.”

“Downside scenario: If bond yields rise meaningfully, then valuation multiples may face headwinds. A slight decline in P/E puts the central case for the S&P at 3,600 levels, assuming earnings rise to levels expected currently. A lower probability scenario would be if earnings estimates for 2021/2022 also falter due to weaker-than-expected pent-up demand pull-through and an unexpected strength in the dollar. Then the central case for the S&P 500 could move lower to the 3,400 levels.”