Why Bullish BofA Thinks Market Gains Might Be Over

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Savita Subramanian looked overly optimistic when she picked her 2013 stock market price target last year—and pessimistic now that she's holding to that prediction.

Nevertheless, the Bank of America Merrill Lynch strategist hasn't cared to join the heavily populated bull stampede on Wall Street, as firms including Goldman Sachs and JPMorgan Chase have issued huge upward revisions on their targets.

"We've gone from being out-of-consensus bulls from the end of last year to out-of-consensus bears by the middle of this year, without having changed our outlook on the market at all," Subramanian said Wednesday at the firm's second-half outlook media briefing.

"We all know this is hardly an exact science," she said. "I would argue the market looks fairly valued, but we could see further upside over the next 12 months."

(Read More: Every Major Asset Class Is Overpriced: Analyst)

Despite the possibility for more upside, Subramanian said she believes the more likely case is that the market has seen its high point for the year and will drift around for the next six months, with investors looking for individual sector plays rather than broad market bets.

Subramanian and the rest of the BofA team—a highly accurate and well-decorated group by those who keep track of forecasts—slapped a 1,600 target on the Standard & Poor's 500 last year.

For a while, it looked like a low-ball prediction.

Fanned by a storm of central bank liquidity, the stock index zoomed all the way to a 1,669 closing before taking a volatile trip down, now nearing that 1,600 bull's-eye.

(Read More: 'Dr. Boom'? Roubini Sees Two Years of Stock Gains)

The forecast was part of the view that a "Great Rotation" was about to occur, with money flowing from bonds into stocks and changing the investment landscape.

While the part about cash going into stocks has proved accurate, it's been less apparent that the flow is from bonds.

Still, the BofA strategists said, there definitely has been rotation of money this year among investment choices, and they expect that to continue.

"We think that we're right at the inflection point for a pretty dramatic reversal in themes and strategies that have worked well over the last several years," said Subramanian, whose title is head of U.S. equity and quantitative strategy. "We think we could see a big change in leadership."

Those possible changes break into three trends: from safety and low-volatility to cyclicals with earnings growth; from high-dividend payers to those with the greatest potential to increase dividends; and out of shares of companies that derive most of their revenue in the U.S. into multinationals.

(Read More: Rising Yields May Stifle Boom in Dividend Stocks)

Overall, the forecast is part of a popular theme that defensive stocks are falling out of vogue, to be replaced by cyclicals.

"There is a very fundamental mispricing of risk in the equity market," Subramanian said. "We seem to be in the process of deflation of this low-beta bubble."

BofA strategists said that investors most likely are overly concerned about the Federal Reserve's pulling back on its stimulus and zero-interest-rate policies.

One of the main reasons the Fed will stay engaged is that this is not the type of recovery that would make central bank policymakers comfortable.

(Read More: Yield Surge Sends Signal of a Scary Second Half)

The economy faces further challenges from automatic spending cuts, known as sequestration, that probably will hold back growth, said Ethan Harris, co-head of global economic research.

"It's way too early to declare victory on the economic recovery," he said.

In other forecast notes: David Woo, head of global rates and currencies research, said dollar strength is the principal global currency story. Priya Misra, head of U.S. rates strategy research, said investors already have priced in most of a Fed pullback, so the onset of tapering should not cause a big market shock.

—By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.