Bank of America said Friday that it sees the "Big Low" for the stock market coming next spring, with the firm targeting the period between March and May for equities to reach their bottom.
Meanwhile, the firm highlighted that small-cap names could outperform in the coming years as the current market shows significant parallels to the one experienced during the stagflationary times of the 1970s.
In a note to clients, BofA argued that the Federal Reserve will need to see the economy dip into recession before it can end its tightening cycle. At that point, equities can enter into a bull market.
"It’s easy to pivot when unemployment 8% & inflation 3% ... much harder to pivot when inflation 8% & unemployment 3%," the firm stated.
Given this outlook, BofA sees the S&P 500 (SP500) (SPY) falling from its current levels of just above 3,700, giving investors increasingly attractive entry points as it drops. This includes the potential for the index to fall to 3,000.
"Nibble at SPX 36k, bite at 33k, gorge at 30k," the firm advised.
Looking longer term, BofA said the 1970s remain "our asset allocation analog for 2020s."
"Many similarities," BofA said of comparing the 1970s to the current market: "big, fat trading ranges, co-dependency of Wall St & Fed, stop-go economic policies, Fed emphasis on core not headline inflation, political instability, war, oil shocks, food shocks, fiscal excess, industrial unrest and so on."
As part of this, the firm advised clients to go "long cash, commodities, volatility, small-cap, value, resources, EM, short stocks, bonds, growth & tech."
BofA specifically spotlighted that small-cap shares entered a "great bull market" following the end of the inflation shock of 1973-1974.
The firm noted that "U.S. small cap entered one of the great bull markets of all-time" during the 1970s and predicted that small-cap stocks would "outperform in coming years of stagflation."
For another perspective on the market, see hedge fund Elliott Management's bleak assessment of the current situation, saying the "world is on the path to hyperinflation, which is the direct route to global societal collapse and civil or international strife. It is not baked, but that is the path that we are treading."