Modest market returns in 2021 risk disappointing today's overexcited investors, Bank of America says

• Vaccine distribution and healthy economic growth might not yield the market returns investors are clamoring for next year, Bank of America said in a note.
• The bank's Research Investment Committee expects the US to lag the global economy in 2021 growth and for markets to post "modest" gains amid the weak recovery.
• The disappointing forecast has strategists "suspicious of an increasingly exuberant market," the bank said.
• Vaccination, stimulus rollout, and market rallies will lead Congress to tighten fiscal conditions and hamper a prolonged rally for risky assets and broad indexes, the firm added.
• Visit the Business Insider homepage for more stories.

Widespread vaccination against COVID-19, an economic recovery, and rebounding corporate profits might not be enough to appease investors, Bank of America said.

The bank's Research Investment Committee expects economic growth to bounce back in 2021 as vaccinations allow for more thorough and faster reopenings. Yet the team is less bullish toward market returns, forecasting "modest" gains through the new year from risky assets and broad indexes.

The US could lag the rest of the world and only fully return to long-term growth in 2022, the bank said, adding that such a disappointing forecast has the team "suspicious of an increasingly exuberant market."

Read more: 'I'm getting a sense of deja vu': A prominent bear rips into the argument that the stock market's 'obscene' valuation is justified - and lays out why a Great Depression-like collapse could strike at any moment

For one, vaccine hopes recently pushed the bank's gauge of Wall Street optimism to its highest point since the financial crisis. The indicator now sits at 57.8%, just 2.7 points away from sending a signal for investors to sell. A record-high $14 billion flow into value ETFs from growth funds in recent weeks further reveals the overwhelming bullishness among investors.

Bank of America expects global GDP to grow 5.4% in the next year, while the US economy grows 4.5%. The S&P 500 will rise roughly 5% to 3,800, and the 10-year Treasury yield will climb to 1.5%, according to the firm's outlook note.

For now, bad news is good news, the bank's strategists said. Soaring COVID-19 case counts and weakening economic data places greater pressure on Congress to pass a large stimulus package. That narrative changes next year, when vaccine distribution, stimulus rollout, and market rallies can lead lawmakers to tighten fiscal conditions and focus on repaying government debt.

History offers little precedent for such a rapid economic recovery, but trends seen in 2011 could bring some insight as to how markets will trend in 2021. Coming out of the financial crisis, stocks rallied 8% in the first half of 2011 before the reality of slowed secular trends and government austerity cut into optimism.

NEWSLETTER

10 THINGS BEFORE THE OPENING BELL

Wake up to the news traders are talking about. Sign up now.

"That 'dashed hopes' dynamic could play out again next year," the bank said.

A handful of potentialities could further drive market volatility, according to the team. Rising defaults in China could reverse the country's swift recovery and plunge its economy into another recession. Bailouts of highly indebted US firms could curb productivity, and lasting work-from-home orders could cap inflation.

Acceptance of nuclear energy solutions and a policy-fueled boon for industrial growth could also shift the bank's outlook.

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

Goldman Sachs says buy these 16 pandemic-hit stocks set to rebound in 2021 - including one set to shoot 159% above profit estimates

One stunning Airbnb chart perfectly encapsulates the ongoing IPO-market frenzy

'It's silly season': Airbnb and DoorDash's IPO rallies signal return of dot-com-era greed, strategists say