Bank of America Merrill Lynch is getting more bullish for its 2013 S&P 500 market outlook. The new target is 1,600. The problem is that the macroeconomic call is saying that stocks are now fully valued for 2012. BofA is keeping its 2012 year-end price target at 1,450, which is about 1% under Friday’s level of 1,466.

For the 2013 outlook, the basis is that the 1,600 target implies 10% returns, with most of the appreciation expected from earnings growth of 7% next year. The firm also expects a slight earnings multiple expansion going from 14.2-times earnings to 14.7-times earnings. That remains under a historic average of 16-times earnings.

What will be good news for the bulls is that 1,600 would represent an all-time high for the S&P 500, above the 1,565 or so from late in 2007. The bullish notes include some supporting data:

• Supportive sentiment and fundamentals,
• Fair value model assumes a 650 basis point risk premium for 2012 and a 600 basis point risk premium for 2013; still well above a long-term average of about 400 basis points, and
• Gradual decline in the equity risk premium over the next several years.

There are some risks or notes of caution for this year as well. BofA noted that economic growth could disappoint this year and into early 2013. Uncertainty is weighing on business and consumer spending over the coming fiscal cliff, which could keep dragging on growth. The recession in Europe, tension in the Middle East and a potential U.S. credit downgrade could all add to volatility in the coming months.

As far as the market pricing today, the firm said, “Given limited upside and heightened downside risk, investors may want to consider purchasing short term protection, or extending their time horizons.”

The SPDR S&P 500 (NYSEMKT: SPY) is up 0.6% at $147.45 this morning and Bank of America Corp. (NYSE: BAC) is up another 3.2% to $9.70 against a 52-week range of $4.92 to $10.10.

JON C. OGG

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