Bank of America says the S&P 500 rally has 5% further to run this year, but sees a near-term pullback first

• Bank of America revised its S&P 500 price target upward to 5,400.
• Still, it said a pullback is likely first, as markets haven't seen a drop in four months.

Bank of America revised its S&P 500 price target upward to 5,400, though getting there won't be a straight line, it said in a note over the weekend.

The bank increased its target for the benchmark index from 5,000, representing a jump of 5% from current levels and a gain of 13% for the full year. Its target puts it on par with UBS as the most bullish forecast among major banks. Goldman Sachs, Morgan Stanley, and JPMorgan hold targets of 5,200, 4,500, and 4,200, respectively.

Analysts at the bank told investors though not to expect the index to rise in a straight line.

Instead, they should prepare for a near-term pullback, as no meaningful drop in the stock market has occurred in four months. On average, dips of 5% typically occur three times a year, while a 10% correction has been observed as an annual event. Still, these declines are usually followed by a rally, BofA analysts added.

"Also, the VIX has increased by 25% from Q2 to November of prior presidential election years. But post-election day, returns have generally been positive from the removal of uncertainty," they wrote.

But BofA's bullish conviction has actually cooled, its analysts said. Instead, the new forecast comes from a weaker emphasis on its sell-side indicator, and upside tweaks to its other measures.

"The Sell Side Indicator, our key sentiment gauge, has seen increasing equity allocations and is now firmly neutral and we lower its weight in our framework. But a neutral call is rarely correct, and the net message of our market timing framework is still, in one word, UP," the wrote.

Earnings strength was one leading reason for the higher price target. With guidance still weak on upcoming performance, likely caused by prior conservative estimates, stocks may be in for positive surprises.

Already, the fourth quarter's earnings season proved encouragingly strong. Valuations, which are strong predictors of long-term returns, indicate over 2.6% in annualized returns over the next decade, according to BofA.