Savita Subramanian is head of U.S. Equity and Quantitative
Strategy at BofA Merrill Lynch Global Research.
: What's your market outlook for 2014?
Subramanian: We're looking for a 10% increase in stock prices.
Assuming dividend yields remain in the same ballpark, as they have
over the past couple of years, that's a 12% to 13% total
The bull market is approaching five years old. What will drive
it forward? We get this question a lot. The duration of the bull
market doesn't matter. It's the contours of economic growth and
Federal Reserve policy. We've been in a fairly protracted
early-stage bull market, which is characterized by easy monetary
policy as the Fed tries to stimulate growth. Normally, the early
cycle lasts a year or two. This time, it has been longer, and it
will continue until the Fed withdraws stimulus. That's typically
the precursor to the middle stage of the bull market. We're looking
for the Fed to begin modestly tapering its bond-buying program in
the first quarter.
What happens then? The market typically does quite well during
the period of time after the easy money goes away but before the
Fed starts to tighten. The market will continue to go up, but the
leadership will transition to the most GDP-sensitive areas of the
market, such as technology, industrials and energy. Leadership has
recently been in stocks that benefit from easy credit early in a
recovery, such as financials and companies that sell
non-necessities to consumers.
Isn't the market starting to look expensive? We've seen values
rise significantly, and the market looks more expensive than it has
since the credit crisis. But it's far from stretched. We recently
looked at 15 measures of value, including price relative to
earnings and to book value (assets minus liabilities), and stock
prices relative to bond yields and commodity prices. By almost
every measure, the market looks fairly priced or undervalued
relative to history. Also, in an environment in which the economy
is starting to accelerate, the market normally looks more expensive
because corporate earnings are about to accelerate, too.
Earnings growth has been anemic lately. But over the past
several years, a lot of earnings growth has been manufactured by
cost-cutting. At a certain point, the economy does better and
demand comes back. Now, we're at the beginning of sales-driven
What themes do you see playing out in the market in 2014? One is
the "Great Rotation" out of bonds and into stocks. I would argue
that we haven't seen it yet. It's been more of a trickle. Over the
past few months, we've seen investors take a little more risk, but
we're still in fairly skeptical territory.
Where should investors put their money now? Look for areas that
do well when the economy picks up and that can withstand a rising
interest-rate environment. We especially like large-company stocks
in the tech, industrial and energy sectors. We also favor globally
diversified companies. Normally, you pay a premium for those stocks
versus stocks that just sell to the U.S. Today, global companies
are trading at the lowest relative values we've seen in a decade.
These companies tend to have smoother earnings, better balance
sheets and global brands. Companies that fit our themes include
General Electric (symbol
, $27), Microsoft (
, $36), ExxonMobil (
, $90), Apple (
, $520) and 3M (
What would turn you bearish on the market? If economic data were
to come in weak and the Fed had to keep easing--we've seen this
movie before--then our sector calls might not be right, although we
think the market overall would continue to rise. I'd also worry if
we stayed in corporate-paralysis mode. Companies have been sitting
on cash and not spending their capital, and they're the machines
that can generate significant growth. The other worry is that we
might get too euphoric on the stock market. We'd turn bearish if we
heard everyone and their brother talking about stocks.