24/7 Wall St. has been tracking the 2015 performance predictions by various firms on Wall Street for stocks and bonds in 2015. Bank of America Merrill Lynch has released its monthly RIC Report, and the prediction is for positive returns in both stocks and bonds. With so many investors expecting a rising interest rate environment for bonds, how can they both work out gains? The answer is slowly, with some bumps along the way.

The monthly RIC Report was led by Martin Mauro, Fixed Income Strategist; Cheryl Rowan, Portfolio Strategist; and Matthew Trapp, Investment Strategist. Some investors might take note here that the year of the sheep is referenced, but even so it is not so bad. The team said:

Under the Chinese zodiac, 2015 is the year of the sheep, an animal considered to be gentle and calm. Our market forecasts fit this description in that we expect modest gains in both stocks and bonds, although undoubtedly with some bumps along the way.

Merrill Lynch’s take is that U.S. stocks are favored over U.S. bonds. Still, those equity returns are not expected to be the return differential as wide as in the past few years. The team argues that stocks have gone from undervalued to fairly valued. All you have to consider is that the bull market is now nearly six years old. Still, U.S. Equity Strategist Savita Subramanian forecasts a 2015 price target for the S&P 500 of 2,200, and that is based on 5% earnings growth on the S&P 500 to $124 per share. The team said:

Improving economic growth should fuel healthy gains in both sales and earnings. Expectations for rate increases are likely to keep bonds in check and put pressure on corporate spreads.

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Technology is still a game changer for 2015. In fact, the sector most favored by Merrill Lynch’s large cap strategists and its small cap strategists is technology. The team said:

It (tech) is the only sector with more cash than debt and benefits from a pickup in global growth. We think investors should focus on the myriad themes found here, such as cloud computing, social media and internet of things.

There may be some good news on the oil front, despite the drop in oil prices and despite the carnage seen in the oil and gas sector. Merrill Lynch advises clients to “give that squeaky portfolio some oil” in 2015. The team looks to larger defensive oil and gas players that can still execute drilling plans — but warns to be highly selective when it comes to smaller oil producers that require a rebound in oil prices. They said:

A 30+% decline in oil prices has weighed heavily on energy stocks but also has created opportunities, as valuations are attractive. We expect a contraction in supply and a pickup in global demand, although investors would be prudent to be selective.

On international markets, there is a focus on the BRIC nations: Brazil, Russia, India and China. The Merrill Lynch team says to focus on India and China, but they see significant challenges remaining for Brazil and Russia.

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Other key areas covered for the fixed income markets in 2015 were as follows:

• Take what the yield curve gives you: “We favor the 10-year maturity range in the taxable market, and 10-15 years in munis. We think the interest rate risk can be managed through laddering.”
• Take what the tax man gives you: “Investors do not seem to be taking full advantage of the tax advantages from munis and securities that pay Qualified Dividend Income.”
• Prepare for Fed rate hikes: “For now, we do not suggest any major adjustments to prepare for Fed rate hikes. We suggest senior loans for investors who can accept credit risk and funds not needed for liquidity purposes.”
• Allocations: raised to mortgage-backed securities and TIPS; lowered to investment-grade and high-yield corporate bonds — with the largest concentration in five-year to 15-year maturities.

The 2015 outlook from this RIC report seems to echo much of the current market sentiment. That being said, this suggests bonds simply may not be as bad an investment as some of the market pundits have warned.

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