The S&P 500 is down 3.3% in the past two weeks on trade war fears and concerns of a global economic slowdown.
Despite the volatility, Bank of America Merrill Lynch analyst Savita Subramanian reiterated a year-end price target for the S&P 500 of 2,900.
The analyst said the market will likely continue to trade sideways, with dovish Federal Reserve rhetoric providing support and trade war headlines providing resistance.
Mixed economic numbers are also suggestive of a trading range for stocks, including string consumer trends and soft manufacturing numbers.
Given Bank of America's flat outlook for U.S. stocks, Subramanian said defensive plays seem relatively overvalued.
"We prefer inexpensive, domestic quality cyclicals like financials, select discretionary and industrials," she said in a note.
For now, Bank of America sees no signs of an imminent U.S. recession.
President Donald Trump's latest threat to impose a 10% tariff on $300 billion in additional Chinese imports kicked off the latest trade war escalation, and Subramanian said the tariffs will certainly hit U.S. companies' bottom lines.
Bank of America estimates S&P 500 EPS will drop 0.3% to 0.4% due to the rising costs associated with the new U.S. tariffs.
At the same time Trump's tariffs are hitting American earnings, Subramanian said the Fed will likely continue to fend off any economic slowdown. Bank of America is anticipating two more 0.24% Fed rate cuts by October.
The near-term S&P 500 target may be disappointing to investors, but Subramanian said long-term investors can still expect annual returns in the 5% range over the next 10 years.
Even after the recent sell-off, the SPDR S&P 500 ETF Trust (NYSE: SPY) remains up 16.1% overall year-to-date.
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