Investing.com -- Bank of America has increased its year-end target for the S&P 500 to 7400 from 7100, which suggests a 3% decline from current levels. The firm's 12-month target stands at 7800, representing a 2% gain from present values.

The bank notes that markets are entering a seasonally weak period and may be due for a pullback. The S&P 500 has seen only one 5% pullback this year in March, compared to the typical three per year. Corrections of 10% or more occur on average once annually, with the last such event happening in spring 2025.

Half of BofA's bear market indicators have been triggered, down from 70% in May-June but still at elevated levels.

The firm points to inflation concerns, noting that current price-to-earnings multiples suggest inflation of 1.7%, while house forecasts predict 3.2% for 2026 and 2.4% for 2027. BofA draws parallels to the 1970s, which saw upside inflation risk, dollar devaluation, Federal Reserve rate hikes, and an oil embargo.

Liquidity conditions have tightened in 2025, with fewer central bank rate cuts, slowing buybacks, and increased equity supply after years of limited issuance. The bank warns that earnings quality has declined and financing costs remain at very tight levels.

BofA forecasts S&P 500 earnings per share growth of 33% in 2026 and 12% in 2027, driven by AI spending, manufacturing, and productivity gains. The firm maintains its long-term positive outlook based on productivity improvements as companies replace labor with processes.

The bank recommends large cap value stocks, select small and mid-cap stocks, and the equal-weighted S&P 500 over the cap-weighted index.