BofA Merrill Lynch (BofAML) global research team has said returns are still to be made as we enter the later stages of the current bull market, but warned of an "aggressive downgrade of risk assets once profits peak".
The team predicted 2018 could be the year of "euphoria" as sentiment had become a more important driver of the S&P 500 than fundamentals, meaning there was still potential for equities to grind higher.
Candace Browning, head of BofA Merrill Lynch Global Research, said: "We have entered the later stage of a long bull market, a phase of positive and improving economic growth that favors strong momentum and growth but also higher risk.
"History suggests that some of the best returns can come at the end of bull markets."
However, the team said they are "macro bullish" and "market bearish" as they predict the S&P 500 will reach a peak of 2,863 points in early 2018, followed by a correction of 10% and slower growth for the rest of the year.
Michael Hartnett, head of global investment strategy at BofAML Global Research, added: "Investors are chasing growth and high-yielding assets in a bull market that has been driven and enabled by central bank liquidity.
"We see an end to this Icarus trade and an aggressive downgrade of risk assets once profits peak, investor positioning becomes excessively enthusiastic and central banks start withdrawing liquidity as they scale back support."
In terms of positioning, the research team predicted equities to outperform bonds, in particular European, Japanese and emerging market stocks, the US dollar to strengthen and volatility to increase.
Candace Browning, head of BofAML Global Research, said: "History suggests that some of the best returns can come at the end of bull markets.
"With valuations and sentiment as high as they are, amid relative economic calm despite political turmoil, we view a pullback in the market next year as an expected norm. And for well-positioned investors, it could very well be a buying opportunity."
BofAML has revealed its top ten macro calls for 2018:
1. S&P 500 continues to rise
The S&P 500 is expected to reach 2,800 points by the end of next year. Earnings are expected to grow 6% based on a 2018 EPS forecast and Trump's tax reform could initially add as much as 14% to earnings.
2. Solid global economic growth
Real global GDP is forecast to grow to a solid 3.8%, up slightly from 3.7% in 2017. Above-trend growth is expected in most major economies, with the euro area maintaining a growth trajectory in 2018 and 2019 of around 2%, and Japan remaining firmly above trend, with nearly 1.5% growth over the same time period.
3. Steady US economic growth
US GDP growth of 2.4% is expected in 2018, up from 2.2% in 2017, but capped by low productivity gains and a slower pace of hiring. The US unemployment rate should drop to 3.9% in 2018, and a tightening labour market will likely allow inflation to pick up.
4. Inflation is back on radar
Inflation is expected to rise in the US, with core inflation reaching 1.8% at the end of 2018 and 2% at the end of 2019. Both wage and price inflation also should trend higher, with wage inflation potentially being the most important factor for the stockmarket in 2018 via margin pressure and credit spreads.
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