Predicting what the stock market will do in the next 12 months is tantamount to predicting coin flips.

Even after what may feel like an already long bull market, it's a mistake to think that a lengthy duration is a sure-fire sign that stocks will soon fall.

"One common refrain we hear from skeptical investors is that bull markets typically last no more than five years, and thus the market is poised for a correction," Bank of America Merrill Lynch's Savita Subramanian has said. "Our work shows that the length of bull markets has varied over time — from two years to nine years — and the dispersion of duration is quite high (a two-year standard deviation)."

In other words, some bull markets will last a few years, and some will last many years.

Particularly interesting is what Subramanian noticed about what five-year returns tell you about what will happen next.

"We find no relationship between historical five-year returns and subsequent 12-month returns," she wrote. Using some simple regression analysis, she found an R-square of 0.0002. That's about as low as R-square gets. (R-square is a statistical measure that reveals how well a regression line — the line of best fit you see — explains the relationship between two variables. The higher the R-square, the better that relationship is explained.)

If higher five-year returns meant lower returns in the sixth year, then we would see a line of dots going from the top left to the bottom right of the chart. This chart appears to be just a random scatter of dots.

Subramanian's research only adds to the pile of work that shows it is incredibly difficult to predict what will happen in the stock market in the next 12 months. Earlier this year, Citi's Tobias Levkovich showed how Robert Shiller's CAPE was terrible at predicting 12-month returns, and BMO's Brian Belski showed how the forward P/E ratio was no better.

Subramanian has a 2,200 year-end target for the S&P 500, and she sees it returning at least another 10% in the next 12 months.

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Investing in the stock market isn't for everyone, especially the faint-hearted who can't handle the downs as well as the ups of the market.

Even in big bull markets, you'll see dips in stock prices.

Successful investors outperform by being patient and riding out the volatility. Losers panic and sell at what might appear to be the beginning of downturns. Losers make the mistake of thinking they can predict what'll happen next and unsuccessfully time the market.

Bank of America Merrill Lynch's Savita Subramanian examined what happened to stock market investors who sold at the first signs of volatility.

"We compare a buy-and-hold strategy vs. a panic selling strategy from 1960-present," she said in a recent note to clients. "We assume an investor sells after a 2% down-day and buys back 20 trading days later, provided the market is flat or up at the end of that period."

Can you guess what happened?

"This strategy underperforms the market on a cumulative basis since 1960 both overall and during every decade, given the best days typically follow the worst days."

Here's how sitting in the S&P 500 compared to panic-selling during the past ten decades. Even during the bad periods, panic-selling was a failing strategy.

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When you see the value of your investments drop before your eyes, your brain sends a funny feeling into your belly that makes you panic and want to "Sell!"

With the global rout we're experiencing right now, that's a feeling that a lot of investors and traders may be getting.

While there's no guarantee that prices won't fall further, history shows that it's moments like this that prove to be the best times to buy.

"Be fearful when others are greedy, and be greedy when others are fearful,"Warren Buffett says.

This is what's called a contrarian strategy.

One of the more popular metrics used by contrarians is Bank of America Merrill Lynch's proprietary "Sell Side Consensus Indicator," which measures bullishness and bearishness among professionals based on how they're recommending clients allocate stocks in their portfolios. When many of them recommend avoiding or staying underweight stocks, this is a reflection of bearishness. And as a contrarian indicator, this is interpreted as a signal to buy.

According to BAML's Savita Subramanian, this indicator isn't screaming extreme bearishness, but it's at the far bearish end of neutral.

"[T]oday’s sentiment levels are still near where they were at the market lows of March 2009 and over 12pts from the level of extreme bullishness that would indicate a contrarian “Sell” signal in our model," Subramanian wrote in  a note to clients on Tuesday. "Strategists are still recommending that investors significantly underweight equities, at 54% vs. a traditional long-term average benchmark weighting of 60-65%."

"With sentiment still near the bearish end of the “Neutral” range of our model, implied 12-month returns are still very robust at +17%," she added.

Citi's Tobias Levkovich was on Bloomberg TV Monday afternoon discussing Citi's proprietary "Panic/Euphoria Model," which is a model that factors in nine metrics like the NYSE short interest ratio, margin debt, Nasdaq daily volume as % of NYSE volume, the put/call ratio, AAII bullishness data, and others.

"Statistically, you’re talking about a 96% probability that markets are up 12 months later," Levkovich told Bloomberg's Alix Steel and Scarlett Fu.

In a note to clients in August, this level of panic has seen an average 12-month return is 17.5%.

Barclays Ian Scott also circulated a note to clients noting the collapse in sentiment as measured by the Investors' Intelligence survey.

"Sentiment towards stocks is now firmly below average, with just 9% more bulls than bears," Scott wrote. "While we would be the first to acknowledge that sentiment does not have a “call” on the market before 2009, in the post Financial Crisis environment, it certainly has. Indeed, whenever the percentage of bulls has dropped below 9.5% the market has consistently been higher 6 months later, with an average gain of 22%."

Ultimately, you'll want to think carefully before making any investing decision. What you see above is just the history.

SEE ALSO: Now might be a great time to be in the stock market

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The Federal Reserve is too friendly.

When the Fed ended its massive bond-buying program (or "QE3" quantitative easing) last October, the path looked clear for eventual interest-rate increases.

But because of stubbornly low inflation and concerns about global economic growth, the Fed has delayed raising rates, most recently last Thursday.

In a note to clients on Monday, Bank of America Merrill Lynch's Savita Subramanian writes that if "QE4" were to happen, it would tell markets that all the extraordinary monetary stimuli of the past few years has not been enough.

And this would be bad news for stocks:

We have noted that each incremental instance of monetary stimulus has been met with diminishing returns for risk assets. We think further easing, or a lack of tightening, in the U.S. is a negative for stocks. The expectation for Thursday's FOMC policy decision was a rate hike and dovish commentary, or no hike and hawkish commentary. Instead, the Fed left rates unchanged and delivered a dovish message. In response, the S&P 500 sold off into the close and was down the next day. As we have noted recently, the biggest risk to equities could be another round of QE—suggesting that $4.5tn was not enough to prop up the U.S. economy.Also, the read across for global risk assets could be that significant liquidity provided by central banks may not always be sufficient to drive markets higher.

Last week, Societe Generale's Kit Juckes told clients that as this era of so-called easy money that has supported asset prices wound down, all the buying that supported it was also waning.

And, according to Subramanian, "the Fed is helping so much it hurts."

SEE ALSO: The party's over

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Bank of America Merrill Lynch has a big long-term call for the S&P 500: 3,500 by 2025.

This may seem like a big number, but with this call BAML is calling for a roughly 67% increase in the benchmark stock index over the next 10 years — the past six years have seen the index nearly triple.

The S&P was trading near 2,090 on Tuesday. 

Now, many will note that the 2009 low was most likely a "generational bottom," or a point at which the market got far less expensive than any reasonable valuation warranted.

And so going forward, BAML is basically calling for less-than-stellar stock market returns that will, however, most likely be better than the alternatives.

Here's BAML's Savita Subramanian:

Based on current valuations, a regression analysis suggests compounded annual returns of 8% over the next 10 years with a 90% confidence interval of 4-12%. While this is below the average returns of 10% over the last 50 years, asset allocation is a zero-sum game. Against a backdrop of slow growth and shrinking liquidity, 8% is compelling in our view. With a 2% dividend yield, we think the S&P 500 will reach 3,500 over the next 10 years, implying annual price returns of 6% per year.

In its year-ahead outlook, BAML calls for the benchmark S&P 500 to climb to 2,200 by the end of 2016, a roughly 5% increase from current levels.

This call is still more aggressive than BAML's in-house "fair value" model of the market, which implies stocks will rise only 1% over the coming year.

And as for when the current bull market could get fully exhausted, Subramanian thinks there will be a major blow-off top before we can call for a regime change in the stock market.

"As we move further into this bull market, the dilemma many investors face is whether or not to maintain equity exposure," Subramanian writes.

Adding:

Performance of equity markets in the last few years preceding market peaks generally has been strong, with the minimum equity market returns achieved in the final two years of a bull market sitting at 30%, with median returns of 45%. Returns preceding the 1937 and 1987 peaks were particularly strong: 129% and 93%, respectively. And returns in the last two years of a bull market cycle have generally contributed over 40% of the total returns of the cycle. The lowest returns achieved in the last 12 months of a bull market were also a still-impressive 11%. These robust returns make the opportunity cost of selling too early potentially quite painful.

And so the core lesson: stay long.

SEE ALSO: Goldman Sachs thinks stocks are going nowhere in 2016

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The stock market's price-earnings (P/E) ratio is probably the most popular and straightforward measure of stock market value out there.

When it's below some long-run average, the market is cheap. When it's about average, the market is expensive.

Unfortunately, just because stocks are expensive, it doesn't mean investors should immediately cash out and prepare for imminent price declines. Indeed, there are many studies that show that valuation tells you very little about what the stock market will do in the next year. But that doesn't mean valuations should be scrapped as a tool for investors.

"Our work suggests that valuation is a poor short-term timing indicator, but the single-most important determinant of long-term returns," Bank of America Merrill Lynch's Savita Subramanian said. "Valuations have historically explained 60-90% of subsequent returns over a 10-year horizon. Normalized P/E – our preferred valuation metric – has explained 80-90% of returns over the subsequent 10-11 years."

Subramanian tested the relationship between P/E and the 12-month returns using R², a statistical measure that reveals how well a regression line — the line of best fit you see — explains the relationship. The higher the R², the better job a P/E ratio does in explaining returns.

Bottom line: The longer your time horizon, the better valuations explain long-term returns.

This is not news. We've seen similar studies from BMO's Brian Belski, Citi's Tobias Levkovich, and others. But just because it's not news doesn't mean its not worth reiterating.

Subramanian and her team are confident that the S&P 500 will continue trending higher over the next 10 years:

Based on current valuations, a regression analysis suggests compounded annual returns of 8% over the next 10 years with a 90% confidence interval of 4-12%. While this is below the average returns of 10% over the last 50 years, asset allocation is a zero-sum game. Against a backdrop of slow growth and shrinking liquidity, 8% is compelling in our view. With a 2% dividend yield, we think the S&P 500 will reach 3500 over the next 10 years, implying annual price returns of 6% per year.

SEE ALSO: GOLDMAN: Stocks will go nowhere in 2016

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Historically, the stock market has been able to deliver around 10% annual returns on average.

The key word when thinking about that, however, is "average." Rarely will you ever see the S&P 500 climb an even 10% in a given year. This 10% is determined by averaging years that have experienced returns much better than 10% as well as years that are much worse or even negative.

Ultimately, it's a mistake to think stock prices just go up, uninterrupted by downturns.

Bank of America Merrill Lynch's Savita Subramanian shared a chart that does a pretty nice job of illustrating the roller-coaster ride that stock market investors actually experience.

She reviewed 12 major S&P 500 peaks since 1930 and averaged the price performance during the months leading into the peak and the months after.

So as much as stocks tend to go up, they frequently also go down sharply. But those downturns are also followed by recoveries. And on net, the patient investor ends positive.

To be clear, this is just a summary of what has happened in the past around market peaks. In between these events are long periods of lackluster action in the markets. Having said that, there are a couple of things to take away from Subramanian's research:

• Returns are very strong in the months leading up to a peak. The median returns in during the six months and 12 months before a peak were 14% and 21%, respectively. An investor seeking gains probably wants to be part of that action.
• Declines after a peak are bad, but they don't offset the gains. The median returns in during the six months and 12 months after a peak were -12% and -15%, respectively.
• But even after the violent sell-offs, markets recover losses in two years. The median return 24 months after a peak is -1%, meaning that most of the losses seen in the six-month and 12-month periods are recovered for patient investors. If anything, downturns are opportunities for investors to buy more and lower their average costs.

Attempting to time the market (i.e., trying to perfectly sell at the high and then buy at the low) is usually a money-losing proposition for investors and traders. But the history — for what it's worth — shows that patient investors will at least be able to recover losses as long as they don't sell at the bottom.

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For 2016, Bank of America Merrill Lynch's Savita Subramanian likes "liquidity over leverage." Specifically, she's recommending to clients that they seek stocks of companies that are financially robust, not in financial distress.

Behind this call is her expectation that this current era of loose monetary policy and tumbling interest rates may be coming to an end, which would put more pressure on companies with low credit quality.

"[A]s liquidity dries up and rates rise, we believe companies with conservative balance sheets and ample capital cushions could fare much better," she wrote in her 2016 outlook for stocks. "These companies are best suited to survive downturns, can sustain or grow dividends, and can take advantage of depressed markets to purchase inexpensive companies or well-timed share buybacks."

During a presentation on Tuesday, Subramanian shared a chart showing how investors had actually been paying up for companies with low credit quality. She illustrated it by showing the history of the forward price/earnings (P/E) ratios of stocks with high-yield debt divided by the forward P/E ratios of stocks with investment-grade debt.

"Perversely, we've spent the last 20 years paying a premium for [the stocks of companies with] high yield debt," she said.

This high-yield, or junk, bond market has been getting a lot of attention lately as credit spreads have blown out. And this pain has actually subtly manifested in the stock market.

"A re-rating is already in the works," Subramanian observed. "High yield (HY) stocks within the S&P 500 are trading a discount to their investment grade (IG) counterparts for the first time in two decades."

With monetary policy in the US expected to tighten during a time when interest rates are at their lowest levels in decades, Subramanian is suggesting to investors that it's time to throw out the old playbook.

"Our overarching theme for the next year, and for the next regime, is to do the opposite of what has worked during the last 30 years," Subramanian wrote. "The last 30 years was a period during which US interest rates were generally falling, and the US dollar was generally weakening. And since the Tech Bubble, we have seen unprecedented amounts of liquidity funneled into the capital markets, and highly-levered, credit-sensitive, smaller-cap and lower-quality stocks and sectors outperformed their more liquid, larger-cap, higher-quality counterparts.

"As we believe we are entering a new regime of slowly rising rates and a stronger dollar, what worked the last 30 years is unlikely to be leadership in the new regime."

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According to Bank of AmericaMerrill Lynch, analysts have slashed 4Q EPS estimates by 12 percent since April due to fears about the macroeconomic environment.

But some companies may now have an easier time beating those lowered expectations.

Led by Savita Subramanian, BAML's equity strategy team has screened for stocks they consider are most likely to beat analysts' estimates for 4Q.

All of their choices are buy-rated stocks that beat either sales or EPS expectations the previous quarter.

All but four stocks from the team's list come from either the Consumer Discretionary, Energy, or Information Technology sectors.

We've listed each of the 17 stocks along with their tickers, sectors, and consensus EPS and revenue estimates for 4Q.

Carnival Corp

Ticker: CCL

Consensus EPS & Sales: $0.06/share on revenue of $3.54 billion.

Sector: Consumer Discretionary

Source: Bank of America Merrill Lynch, Yahoo Finance

Home Depot Inc.

Ticker: HD

Consensus EPS & Sales: $0.64/share on revenue of $17.65 billion.

Sector: Consumer Discretionary

Source: Bank of America Merrill Lynch, Yahoo Finance

Lowe's Cos.

Ticker: LOW

Consensus EPS & Sales: $0.24/share on revenue of $10.82 billion.

Sector: Consumer Discretionary

Source: Bank of America Merrill Lynch, Yahoo Finance

With stocks sitting near all-time highs, some experts warn that market sentiment is getting frothy.  Historically, when sentiment peaks, stocks start to sell-off.

Bank of AmericaMerrill Lynch's Savita Subramian agrees that sentiment has improved.  But she argues that they are far from those dangerously bullish levels.

"Even though the S&P 500 has already risen 10% in the six months since sentiment bottomed, history suggests that rising markets can persist for years after sentiment troughs," writes Subramanian in a new note to clients.  "Some have argued that our measure of sentiment, which is based on sell side strategists’ equity allocation recommendations, does not adequately capture today’s bullish market sentiment, as evidenced by the recent surge in equity inflows and rising stock prices."

Here's a look at where BAML's popular proprietary indicator.  It's still bullish for stocks.

Subramanian expands on two reasons why she still thinks sentiment isn't very bullish.

1) Sell-side strategists aren't bullish

"While 13 of the 15 strategists contributing targets to Bloomberg’s strategist poll at the start of the year were forecasting that the S&P 500 would end the year higher in 2013, the average implied upside was less than 5%, below the 50-year average price return of 7% and the lowest forecasted upside in eight years. In fact, following the market’s recent rally, the forecasted upside for the rest of the year has fallen to only 1%. This corroborates the subdued sentiment reading from the Sell Side Indicator."

2) Equity inflows have been big, but not big enough to offset years of outflows

"Despite record inflows into equity long-only funds this year, it has not been enough to offset capital outflows over the past several years. As a result, equity long-only funds remain one of the only asset categories to have negative cumulative inflows over the past three years."

Subramanian sees the S&P 500 ending the year at 1,600.

SEE ALSO: WALL STREET: Here's What The S&P 500 Will Do This Year >

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Fat corporate profit margins have been a key driver of the surging stock market.  Indeed, this has been the foundation of recent earnings growth.

But is this theme sustainable?

"One of the most common bearish arguments that we hear from clients is that margins are mean-reverting," writes Dan Suzuki, equity strategist for Bank of AmericaMerrill Lynch. "With net margins near record levels, a reversion to the mean would result in a 15-20% hit to earnings."

This is the position shared by the likes of John Hussman, GMO's Jeremy Grantham, and SocGen's Albert Edwards.

Some have attributed recent profit margin gains to companies squeezing more out of their workers.  This would explain why corporate profits have surged to record highs even as wages have stagnated and unemployment rates remain stubbornly high.

Low wage-driven margin gains are unsustainable, warns David Rosenberg.

However, the bears appear to be focusing too much on what amounts to being a small component of margin gains.

"There are several reasons why margins should remain structurally higher than the historical average," writes Suzuki. "Importantly, roughly two-thirds of the improvement in net margins can be attributed to changes below the operating line, specifically interest expense and taxes."

Here's Suzuki's breakdown of how margins got to be so fat.

And Suzuki thinks low interest expense and taxes are sustainable:

The S&P 500’s effective tax rate has fallen as an increasing share of profits is being generated from overseas where tax rates are lower. We do not expect any meaningful decline in the share of foreign profits, and if we eventually see US corporate tax reform, most of the proposals actually call for corporate tax rates to be lowered, not raised. Meanwhile, lower leverage levels and interest rates have reduced the interest expense burden of companies, and although we could see interest rates rise from current depressed levels, we would still expect them to remain well below history. We also do not see any rush for corporations to meaningfully re-lever their balance sheets for the foreseeable future. Every 10bp of margin expansion translates into roughly 1ppt faster EPS growth relative to sales growth.

Suzuki believes it's a mistake to think that margins will revert to a long-term mean just for the sake of reverting to a mean.

Rather, he argues that high margins reflect a long-term structural change, not a short-term cyclical one.  This has long been the position of veteran market strategists David Bianco of Deutsche Bank and Brian Belski of BMO Capital.

So, while it may be the case that low wages are unsustainable, the profit margin story is being driven by much larger long-term forces.

Suzuki expects S&P 500 earnings to grow to $115 per share in 2014, up 6% from this year's $109 level.

"While we expect global economic growth to accelerate in 2014, growth will continue to be hampered by global fiscal austerity with limited scope for significant incremental monetary easing," he wrote.  "And given how lean corporate cost structures have already been cut, we believe it will be difficult for corporations to generate further earnings growth through further margin expansion. As such, we expect the S&P 500 to maintain the current growth trajectory of 5-7% annually."

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Stock market strategists are getting more bullish, and while that may be a good thing in the short-term it could lead to problems down the line.

Sentiment among so-called sell-side strategists has spiked in the post-election surge for stocks, according to Savita Subramanian, Bank of America Merrill Lynch's head of quantitative and equity strategy. 

"In November, the Sell Side Indicator — our measure of Wall Street’s bullishness on stocks — jumped by 1.6 percentage points to a six-month high of 51.5, its biggest increase in over a year," wrote Subramanian in a note to clients on Thursday.

This still means that strategists are bearish overall. Even though sentiment is rising, Wall Street's enthusiasm is still below highs from last summer. 

The indicator is a contrarian one, thus when the sell-side is bearish it is time to buy stocks and vice versa. So right now, its still signaling that  stocks could climb significantly over the next year.

"With the S&P 500’s indicated dividend yield currently above 2%, that implies a 12-month price return of 17% and a 12-month value of 2576," said Subramanian.

But that's where things will start to roll over. That jump, which would be 378 points above Wednesday's close, would most likely come with a corresponding surge in sentiment and the contrarian indicator will start to flash "sell."

"But the post-election bounce in Wall Street sentiment could be the first step toward the market euphoria that we typically see at the end of bull markets and that has been glaringly absent so far in the cycle," said Subramanian. 

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Most economists and stock market strategists agree that a boom in capital expenditures — that is, business investment — will be the next major catalyst to economic and earnings growth.

But since the financial crisis, most companies have deployed excess cash toward building up their balance sheets. And with growth prospects limited, many companies have also opted to return cash to shareholders in the form of buybacks and dividends.

But according to a new survey conducted by BofA Merrill Lynch Global Research, investors would much rather have companies use that cash via capital expenditures (that is, business investment). These expenditures could include the financing of both maintenance and growth projects.

"More than ever, investors are agitating for companies to invest in growth instead of using their cash for buybacks, dividends, or balance sheet repair," said strategist Savita Subramanian. "BofAML’s Global Fund Manager Survey suggests that 58% of investors currently prefer capex over other forms of cash deployment — a record high in the history of the survey data (since 2002)."

And it's not just talk.

"As valuations have risen, companies engaging in significant share buybacks have begun to underperform, in stark contrast with the outsize gains we saw during 2012 and most of 2013," noted Subramanian referring to the chart below. "This contrasts with the recent outperformance of companies that are investing in growth."

In other words, investors may be punishing companies for buying back stock.

Everyone's been writing about capital expenditures lately. Perhaps 2014 is when the boom finally happens.

SEE ALSO: Four Takes On The CapEx Conundrum

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Wall Street's predictions for 2015 have been rolling in fast and furious over the last few weeks, and the latest firm giving its projection for the S&P 500 is Bank of America Merrill Lynch.

Savita Subramanian and the equity strategy team at BAML see the S&P 500 rising to 2,200 in 2015, a modest 6% return.

Subramanian notes that this is the lowest forecasted S&P returns since her team took over the year-end forecast role in 2011. 

"Stocks certainly look more attractive than bonds," Subramanian writes, "[but] the case for stocks versus other asset classes is less clear."

Subramanian notes that gold and oil are now particularly cheap against stocks on a historical basis, and she expects that stocks will rise in-line with earnings growth. But similar to the forecast from David Kostin and the equity team at Goldman Sachs, Subramanian sees no multiple expansion for the S&P 500 in 2015. 

Despite the modest upside forecast, Subramanian still sees plenty of reasons to buy US stocks. 

"[Bank of America Merrill Lynch's] Sell Side Indicator, which tracks Wall Street Strategists' average recommended allocation to US equities, currently sits at just 52%," Subramanian notes. "This is up from the all-time low of 43% we observed in July 2012, but well below the historical strategic equity allocation of 60-65%."

And so with investors likely underinvested in stocks, this is a bullish sign.

Subramanian also says that though the aging — and retiring — US population is often cited as a negative for stock, Boomers will need both income and capital appreciation, making the S&P 500's dividend-paying members attractive to these investors. 

To this end, Subramanian sees "big, old and ugly" stocks as potential leaders in 2015, and says investors ought to consider leaving the "new, shiny, exciting IPOs alone."

And overall, though Subramanian expects more modest gains in 2015, she says the bull market is still in tact.

"So while returns may compress from the outsized gains we have seen over the last several years, we remain constructive on equities. The bull market in stocks is not over, in our view."

For some perspective, here's what some of Wall Street's other top strategists have predicted so far:

• Bank of America Merrill Lynch's Savita Subramanian: 2,200
• Credit Suisse's Andrew Garthwaite: 2,100
• Goldman Sachs' David Kostin: 2,100
• Barclays' Jonathan Glionna: 2,100
  
• Deutsche Bank's David Bianco: 2,150
• Citi's Tobias Levkovich: 2,200
• UBS's Julian Emanuel: 2,225
• Oppenheimer's John Stoltzfus: 2,311

SEE ALSO: One Wall Street Bull Expects Another Year Of Double-Digit Gains

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From Bank of America Merrill Lynch's Savita Subramanian:

Intra-stock correlations ticked down slightly in 1Q to 35% from 37%, which is typically a benefit to stock-pickers, but they remain elevated vs. their average of 26%.

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The biggest threat to stock probably isn't what you think.

People who think the Federal Reserve's asset purchases drove the rally in stocks are dreading higher interest rates.

They argue that higher rates will derail the rally by increasing the cost of borrowing and putting pressure on company's earnings.

But analysts at Bank of America Merrill Lynch think the impact this will have is overstated and the Fed will in fact be doing the opposite of what people are anticipating is the biggest risk for stocks.

In a note to clients, BAML's Savita Subramanian writes that a fourth round of bond buying (called quantitative easing, or QE) by the Federal Reserve is actually the biggest threat to stocks:

While most are focused on the risks around a withdrawal of liquidity, we believe the biggest hit to confidence could be the opposite: if another round of US QE is necessary to prop up the economy. While the market could have a knee-jerk rally on an indication of forthcoming stimulus, we think this would likely be short-lived and could end in the red. QE fatigue is already evident: each subsequent round of QE has seen diminishing risk rallies.

The reason? It would be a sign that $4.5 trillion in QE was not enough, Subramanian writes.

And it won't look great for central banks in Europe and Japan — which are already in QE mode — if the US heads in that direction.

Right now this option isn't on the bank's radar, since the third round of quantitative easing has brought the Fed to a point at which it has signaled a rise in interest rates this year.

Also, we've seen that stocks have rallied in the six months leading up to and after the Fed's seven rate hikes since 1983.

And so the biggest risk to stocks does not appear imminent. But this risk is also something not many people are talking about.

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The Oracle of Omaha is facing some opposition.

In a note to clients on Monday, Bank of America Merrill Lynch’s Savita Subramanian wrote that Warren Buffett’s favorite metric of long-term value "may have limited utility."

The market cap to GDP ratio, which once characterized as the "single best measure" of value, is used to determine whether the stock market is overvalued or undervalued.

And given that this measure shows the S&P 500 is 80% above its historical average level, some might find signals from the market cap to GDP ratio concerning. But BAML is skeptical about how good of a measure it actually is of the stock market's value. 

Subramanian points to three main reasons why the metric is not one of BAML’s favorite for valuing equities:

1. Market Cap/GDP is like Price/Sales, "with all of its shortcomings and more." BAML adds that neither measure takes structural changes in profit margins into account, which is problematic. In 2014 corporate margins grew to new highs due to lower taxes, lower interest expense, and higher operating margins in tech.
2. Global GDP should be used because it is more closely tied to the S&P 500 than US GDP. This is because S&P companies are generating more and more sales and profits from overseas, not just in the United States.
3. There are too many mix differences between the US equity market and the entire US economy. For example, sectors like technology and energy hold a much stronger weight in the stock market than they do for US GDP. Also, US GDP is more services-oriented, while profits from S&P companies are more goods-oriented.

Here’s what the Market Cap to GDP ratio has looked like since 1964:

And so this measure currently makes the stock market look expensive, but at least in BAML's view, there are plenty of reasons not to worry about something that might have the world's most famous investor concerned.

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Predicting what the stock market will do in the next 12 months is tantamount to predicting coin flips.

Even after what may feel like an already long bull market, it's a mistake to think that a lengthy duration is a sure-fire sign that stocks will soon fall.

"One common refrain we hear from skeptical investors is that bull markets typically last no more than five years, and thus the market is poised for a correction," Bank of America Merrill Lynch's Savita Subramanian has said. "Our work shows that the length of bull markets has varied over time — from two years to nine years — and the dispersion of duration is quite high (a two-year standard deviation)."

In other words, some bull markets will last a few years, and some will last many years.

Particularly interesting is what Subramanian noticed about what five-year returns tell you about what will happen next.

"We find no relationship between historical five-year returns and subsequent 12-month returns," she wrote. Using some simple regression analysis, she found an R-square of 0.0002. That's about as low as R-square gets. (R-square is a statistical measure that reveals how well a regression line — the line of best fit you see — explains the relationship between two variables. The higher the R-square, the better that relationship is explained.)

If higher five-year returns meant lower returns in the sixth year, then we would see a line of dots going from the top left to the bottom right of the chart. This chart appears to be just a random scatter of dots.

Subramanian's research only adds to the pile of work that shows it is incredibly difficult to predict what will happen in the stock market in the next 12 months. Earlier this year, Citi's Tobias Levkovich showed how Robert Shiller's CAPE was terrible at predicting 12-month returns, and BMO's Brian Belski showed how the forward P/E ratio was no better.

Subramanian has a 2,200 year-end target for the S&P 500, and she sees it returning at least another 10% in the next 12 months.

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Investing in the stock market isn't for everyone, especially the faint-hearted who can't handle the downs as well as the ups of the market.

Even in big bull markets, you'll see dips in stock prices.

Successful investors outperform by being patient and riding out the volatility. Losers panic and sell at what might appear to be the beginning of downturns. Losers make the mistake of thinking they can predict what'll happen next and unsuccessfully time the market.

Bank of America Merrill Lynch's Savita Subramanian examined what happened to stock market investors who sold at the first signs of volatility.

"We compare a buy-and-hold strategy vs. a panic selling strategy from 1960-present," she said in a recent note to clients. "We assume an investor sells after a 2% down-day and buys back 20 trading days later, provided the market is flat or up at the end of that period."

Can you guess what happened?

"This strategy underperforms the market on a cumulative basis since 1960 both overall and during every decade, given the best days typically follow the worst days."

The table below shows how sitting in the S&P 500 compared to panic-selling during the past ten decades. Even during the bad periods, panic-selling was a failing strategy.

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When you see the value of your investments drop before your eyes, your brain sends a funny feeling into your belly that makes you panic and want to "sell!"

With the global rout we're experiencing right now, that's a feeling that a lot of investors and traders may be getting.

While there's no guarantee that prices won't fall farther, history shows that it's moments like this that prove to be the best times to buy.

"Be fearful when others are greedy, and be greedy when others are fearful," Warren Buffett says.

This is what's called a contrarian strategy.

One of the more popular metrics used by contrarians is Bank of America Merrill Lynch's proprietary "Sell Side Consensus Indicator," which measures bullishness and bearishness among professionals based on how they're recommending clients allocate stocks in their portfolios. When many of them recommend avoiding or staying underweight stocks, this is a reflection of bearishness. And, as a contrarian indicator, this is interpreted as a signal to buy.

According to BAML's Savita Subramanian, this indicator isn't screaming extreme bearishness, but it's at the far bearish end of neutral.

"[T]oday’s sentiment levels are still near where they were at the market lows of March 2009 and over 12pts from the level of extreme bullishness that would indicate a contrarian “Sell” signal in our model," Subramanian wrote in a note to clients on Tuesday. "Strategists are still recommending that investors significantly underweight equities, at 54% vs. a traditional long-term average benchmark weighting of 60-65%."

"With sentiment still near the bearish end of the “Neutral” range of our model, implied 12-month returns are still very robust at +17%," she added.

Citi's Tobias Levkovich was on Bloomberg TV Monday afternoon discussing Citi's proprietary "Panic/Euphoria Model," which is a model that factors in nine metrics like the NYSE short-interest ratio, margin debt, Nasdaq daily volume as % of NYSE volume, the put/call ratio, AAII bullishness data, and others.

"Statistically, you’re talking about a 96% probability that markets are up 12 months later," Levkovich told Bloomberg's Alix Steel and Scarlett Fu.

In a note to clients in August, he wrote that this level of panic has seen an average 12-month return is 17.5%.

Barclays' Ian Scott also circulated a note to clients noting the collapse in sentiment as measured by the Investors' Intelligence survey.

"Sentiment towards stocks is now firmly below average, with just 9% more bulls than bears," Scott wrote. "While we would be the first to acknowledge that sentiment does not have a “call” on the market before 2009, in the post Financial Crisis environment, it certainly has. Indeed, whenever the percentage of bulls has dropped below 9.5% the market has consistently been higher 6 months later, with an average gain of 22%."

Ultimately, you'll want to think carefully before making any investing decision. What you see above is just the history.

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