Wall Street’s worst-case scenario for stocks in 2021

With the launch of a vaccine, another stimulus package, and a longer-term recovery in the economy and corporate earnings on the horizon, even the least optimistic Wall Street strategists believe stocks will rise over the next year.
However, both known and unknown risks could affect the optimistic outlook of many forecasters. And of course no strategist expected the biggest volatility driver in 2020 at this time last year - the coronavirus pandemic.
Some strategists have weighed these risks more carefully. Out of a dozen stock outlooks for Wall Street 2021 compiled by Yahoo Finance, Bank of America's forecast turned out to be the least optimistic of the bulls. BofA stock strategist Savita Subramanian sees the S&P 500 (^ GSPC) climb to 3,800 by the end of 2021, up just about 2% from the index's recent record high on December 17.
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The S&P 500 is about to close this year with a plus of more than 14%. And the median strategist pursued by Yahoo Finance sees the S&P 500 rise to 4,150 next year, well above Bank of America's base price target.
Subramanian's argument for more cautious progress over the next year hinges on her assumption that investors have already digested and priced in much of the good news about vaccines and the wider economic reopening that vaccines will bring. And as expectations rise, so does the possibility of disappointment, which leaves room for a bearish scenario where stocks could over-run their recent advances and fall over the next year, she said.
"Recovery is intact and the world will likely reopen in the second hour, but a lot of optimism about vaccine / recovery is already being priced in," Subramanian wrote in a recent note. "A simple shift in the equity risk premium to the last decade average of ~ 500-550 basis points (down from 437 basis points now) would bring the S&P 500 down to 3,000-3,050."
30 July 2020, Hessen, Frankfurt am Main: The sculptures of the bear and the bull are in front of the Frankfurt Stock Exchange. (Photo by Frank Rumpenhorst / Image Alliance via Getty Images)
"Some themes support stocks, however: the dividend yield on the S&P 500 is three times the 10-year return, and the dividends on the S&P 500 are expected to rise in 2021," she added. "And unlike bond yields, profits are nominal and add to the upward trend in inflation - where inflation risks may be higher given rampant money pressures and a possible surge in demand for vaccinations."
Nevertheless, their style and industry recommendations support the overarching thesis of a broad-based economic recovery in the next year. Subramanian suggested value stocks versus growth, cyclicals versus defensives, and small-cap stocks versus large-caps for the next year.
"Value stocks are the new growth stocks," she said. "Our two top sectors are unapologetically cyclical and value-oriented: finance and energy."
Both the finance and energy sectors showed the biggest underperformance in the S&P 500 this year.
"Technology and healthcare offer neglect and growth at a reasonable price," she added. "We are underweight [consumer staples], real estate and communications services, which we believe represent the past leadership in terms of fixed income and world growth," she added. "We prefer small to large companies as we expect a strong economic recovery in the US."
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
Read more from Emily:
Stock Market 2021: Stocks are expected to continue rising as strategists look to a brighter year 2021
The Big Risks Wall Street Is Watching For 2021
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