The stock market will hit record highs by the end of the year based on Goldilocks scenario, Bank of America says

• The stock market could hit record highs before the end of the year, according to Bank of America.
• When stocks are up 10%-20% heading into September, the month's returns are positive 65% of the time, BofA said.
• "2023 has a bullish setup for September and the rest of the year."

The stock market is in a Goldilocks scenario that could make conditions just right for record highs before 2023 is over.

According to a Friday note from Bank of America's technical analyst Stephen Suttmeier, the S&P 500 is entering September in a promising middle ground.

While September is typically the worst month of the year for stock market returns, that's not the case when stocks are already up 10% to 20% heading into the month, he noted. And that's exactly where we are, with the S&P 500 up nearly 18% year to date.

"2023 has a bullish setup for September and the rest of the year," Suttmeier said.

Since 1928, stocks are up only 44% of the time in September with an average and median return of -1.16% and -0.49%, respectively.

But in years when the stock market is up between 10% and 20% heading into September, like it is now, market returns are positive 65% of the time during the month, with an average and median gain of 0.77% and 1.49%, respectively. That's a big improvement.

Additionally, in the same Goldilocks scenario as outlined above, the stock market returns an average and median gain of 7.57% and 8.17%, respectively, and is up 91% of the time from September through December.

"This equates to S&P 500 [at] 4,850 to 4,875 into year-end 2023," Suttmeier said. And that would be a record high for the index, which peaked at 4,818 right before entering a painful year-long bear market in January 2022.

The seasonality data also suggests that the August sell-off in the stock market was healthy and should have been welcomed by investors. That's because without the sell-off, the S&P 500 would have headed into September with a more than 20% year-to-date gain.

According to Suttmeier, year-end returns in the stock market have been weaker when stocks are up that much, as it "may be too extreme for the S&P 500 to continue its winning ways."

Suttmeier found that the stock market is up only 45% of the time in September during this scenario, with an average gain of -0.67%. And from September through December, it's up 64% of the time with an average return of -1.40%.