BANK OF AMERICA: A 'melt-up' in stocks will push the market 5% higher by March

'Phase one' trade deal

Global stocks surged to record highs on Friday after the US and China agreed on a "phase one" trade deal before new tariffs were slated to go into effect Sunday. President Trump confirmed Friday that the US would pull back duties against Chinese imports as part of the deal, easing pressures that drove stock volatility since the conflict began in July 2018.

The interim deal resolves a significant "global macro tail risk" and removes "risk premiums" from the 10-year Treasury and the S&P 500, the analysts wrote. The pause on further tariff escalations marks a major step in resolving the trade war, and helped push the bank's sentiment indicator to an 18-month high on December 12.

Brexit resolution

Last week brought clarity to another global economic boon, with the UK's December 12 general election yielding an overwhelming Conservative Party majority. Boris Johnson emerged victorious despite previous defeats in passing his Brexit agenda, and pledged to expedite the process of separating the UK from the European Union.

"It does look as though this One Nation Conservative government has been given a powerful new mandate to get Brexit done," Johnson said after winning his Uxbridge seat.

The prime minister is expected to reintroduce his Brexit bill before Parliament takes a holiday recess. Though the legislation is unlikely to see a vote before the new year, the new Conservative Party majority removes much of the uncertainty around Brexit and the form it would take.

A Brexit resolution, when coupled with the easing trade tensions between the US and China, demystifies some of the global risks dragging stock markets lower, the analysts said.

Central bank policy

The bank's analysts also cited liquidity operations from the Federal Reserve and European Central Bank as factors driving their S&P 500 target. The capital injections calm money market pressure and add more funds to nations' economies.

The Fed increased its plan for overnight repurchase agreement, or repo, operations on December 13, adding more cash in early 2020 as lending markets face heightened risks. Similar ECB injections will help drive global stocks higher, the analysts said.

The US central bank is also in a rate-cut pause after lowering its key interest rate three times in 2019. Fed Chair Jerome Powell hinted at a pause in adjustments in 2020 during a December 11 meeting, keeping stocks from braving a rate hike in the new year and the increased saving that often follows.

Now read more markets coverage from Markets Insider and Business Insider:

Trump complained about the US dollar's strength throughout 2019 — but these 8 major currencies were even stronger

We just got a stark warning that the US economy is slowing as trade tensions persist

We interviewed Wall Street's 7 top-performing investors to get their secrets for success — and their best ideas for 2020