Analysts from Bank of America Merrill Lynch made a very bullish prediction for the S&P (NYSEARCA:SPY) next year. BAML predicts that the S&P 500 could see 1,600 in 2013. BAML did a fairly good job predicting an S&P target for 2012. Economists from the bank stated that the index would touch 1,450 in 2012, which actually came true. A 1,600 price target would mean the index would have to return more than 11%. This type of return would more than likely cause the Dow and Nasdaq to rise significantly as well. BAML may have predicted its 2012 projections accurately, but I believe 1,600 is being fairly optimistic given the current environment.
In order for 1,600 to be considered reasonable, we need to look at the factors that would drive such a rise. A major one is GDP growth, which will ultimately tell us how much the U.S. economy will grow in 2013. PIMCO predicts the GDP will grow between 1.25% and 1.75%. PIMCO believes that fiscal cliff crisis will be solved, but it will still drag down GDP growth by more than 1%, which is still fairly substantial.
Also considering that many S&P 500 companies do business in Europe, it's very likely that a slowdown there will have a material effect on earnings. PIMCO's Saumil Parikh believes that the Eurozone's economy will shrink between 1% and 1.5% next year.
The UK and Japan will both see flat to no growth, which could drag earnings down even further going forward. While countries are expected to see declines in GDP growth for next year, BofA is not necessarily using GDP as a driver for the stock market. A big driver for their predictions seems to be revolved around a thesis called the "Great Rotation". This is when investors switch asset classes and move money from fixed-income into equities.
The idea is that if rates rise then there no longer is a need for investors to purchases bonds and eventually they will sell. This would cause the flow of funds to move into equities. BofA's predictions may be premature given the fact Bernanke has already stated to keep interest rates low until 2015. It's very likely that investors will continue to stay in bonds at least until there is some sign of global economy stability and a rise in interest rates. While BofA may have been accurate about 2012, their predictions for 2013 seem a little too optimistic given the looming fiscal cliff and an overall slowdown in the global economy.