BofA raises S&P 500 target to 5400, predicts broadening out

According to the US Bureau of Labor Statistics, 275,000 non-farm payroll jobs were added in February, with the unemployment rate still increasing to 3.9%. Earlier this week, Bank of America raised its year-end price target for the S&P 500 (^GSPC) to 5400 from 5000, the bank claiming it has seen improved sentiment and expects a broadening out in market leaders.

BofA Securities Senior US Equity Strategist and Head of US SMID-Cap Strategy Jill Carey Hall joins Yahoo Finance to explain how Friday's jobs report figures into the bank's S&P 500 forecasting.

Hall offers an optimistic macro picture, but explains euphoria has been concentrated in certain pockets of the market: "We are forecasting that the Fed will begin cutting rates in June of this year, so we are looking for 3 cuts this year and 4 cuts next year. We have still been in an environment where the consumer is strong, we expect inflation to continue to cool, but we do see the case that the equity market is more likely to go higher than lower from here. Equity market sentiment has certainly gotten more positive, but euphoria is not really what we're seeing in the broader market yet."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video transcript

SEANA SMITH: The big story of the day, the jobs number coming in just above expectations at least on the headline print. 275,000 jobs added to the month. The Street had been looking for 200,000 showing some strength in the workforce. But we got to point out that the unemployment rate did tick higher to 3.9%, the average hourly earnings on a month-over-month basis coming in just below what the Street was looking for, a tenth of a percent rise. Well, ahead of all this earlier this week Bank of America raising its year end target for the S&P to $5,400 from $5,000.

The bank seeing improved sentiment for the year and also expecting maybe some broadening action in terms of leadership. So let's talk about how this report fits into that call and what we could expect for equities going forward. We want to bring in Jill Carey Hall, Bank of America securities senior US equity strategist and head of US Small and Mid-Cap Strategy. It's great to see you here. So first, just your reaction to the print that we're getting. I was just asking Josh, our markets reporter, whether or not this is exactly the type of report that the Street wants to see. What do you think?

JILL CAREY HALL: Yeah. I mean, I think our economists were forecasting $215,000, so a little bit above consensus obviously came in stronger, but you did see a tick up in the unemployment as you mentioned. So we are forecasting that the Fed will begin cutting rates in June of this year, so we're looking for three cuts this year, four cuts next year. So we've still been in an environment where the consumer is strong. We expect inflation to begin to continue to cool. But we do see the case that the equity market is more likely to go higher than lower from here.

So I think equity market sentiment has certainly gotten more positive, but euphoria is not really what we're seeing in the broader market yet. It's been more concentrated in pockets of the market. Themes that we've seen like AI and Magnificent Seven. But when you look at the broader S&P 500, we do see the case that you could see a broadening out of leadership to the rest of the market outside of some of the largest stocks. We also think that small caps could outperform this year, and that's an area that typically does well after you've seen a very narrow market like we saw over the past year.

BRAD SMITH: Jill, it's clear that this is a Fed that doesn't want to be accused of being too quick to cut. And so with that in mind, higher for longer has been what they've put out there in terms of their commentary and their tenor thus far. So now if June is on the table, what does the rest of that pacing look like and is there anything within that that the market is already expecting already pricing in at this point?

JILL CAREY HALL: So we're looking for three cuts this year beginning in June and then for next year. I think when you look at the market today, the market has been trading at rather elevated valuations on the majority of metrics that you track. So if we look at 20 different valuation metrics for the S&P 500, the market looks expensive versus history on 19 out of the 20. And I think when you look at valuation, it does matter. It tends to be a better predictor of long-term returns than short-term returns.

So we could definitely see lower than average equity market returns over the next decade if you have a long-time horizon still positive, but call it 3% annualized returns over the next decade or what valuations are suggesting today. That said, we could see valuations get more expensive near term. Certainly that could happen. We tend to be in an environment where the market, we think we're in an environment where the market has gotten higher quality. It looks a bit different than it has been in prior decades. It's less levered, so there could be reasons that we see a lower equity risk premium than we've seen in prior decades and better normalized earnings power for the market.