BofA Strategist: 8% Gains In 2012, But Volatile

 |  Includes: DIA, QQQ, SPY
by: Market Blog

By David Berman

The current year still has about six weeks of life left in it. But already Savita Subramanian, equity and quant strategist at Bank of America, has issued her year-end target for the S&P 500 for next year: 1350. Now, that might imply smooth sailing from here on in, given that the broad index is currently sitting at 1250. A hundred-point increase represents a gain of 8%, which is in line with average annual gains for U.S. stocks.

However, the next 13 months should be anything but average, the way Ms. Subramanian sees things, with volatility and uncertainty still hanging over the market. Her target is based primarily on earnings. She estimates that companies within the S&P 500 should generate earnings of $104.50 (U.S.) a share next year, which is a little lower than the $108 a share consensus expectation. Her expectation stems from a more cautious approach to companies that have exposure to Europe and the U.S. consumer, and is based on earnings growth slowing over 2011.

"The bottom-up consensus reflects a generally more optimistic view of next year’s earnings outlook across nearly all sectors, with the biggest differences (in dollar terms) for the financials, tech and consumer discretionary sectors," she said in a report. "Our lower earnings growth outlooks for Financials (14% vs. 24%), Tech (4% vs. 10%) and Consumer Discretionary (3% vs. 12%) reflect our expectations for a mild recession in Europe, decelerating growth in China, slowing domestic consumption trends and elevated regulatory and litigation risk for the Financials."

That's right, she said she expects a recession -- though a mild one -- in Europe. Helpfully, she has provided an estimate for U.S. exposure to the crisis-prone region. Companies within the S&P 500 have an 18% exposure in terms of earnings, and 14% in terms of sales. Tech companies have the greatest exposure, followed by energy producers, industrials and consumer companies.

That said, consumer staples are her top sector pick, given that this is the only area of the market that should not experience a deceleration in earnings growth in 2012. The dividends are nice and it's a decent contrarian pick, given that the sector is "under-owned" by fund managers.

And despite tech's exposure to Europe, it, too, is attractive. These companies have good valuations and are already discounting a pretty dismal-looking future. Tech companies are also cash-rich, making this a good play on share buybacks and rising dividends.

Disclosure: None