4 longshot bear-market scenarios that could upend the record stock rally, according to BofA

• There are growing risks that could upend the record rally in the stock market, according to Bank of America.
• But a resilient economy and solid earnings results suggests the bear risks may not be too serious.
• These are the 4 long-shot bear case scenarios investors should monitor, according to BofA.

With stocks hitting record highs, it's not a bad idea to keep a close eye on the potential risks that could upend the stock market rally.

That's what Bank of America equity strategist Savita Subramanian did in a note over the weekend, though she isn't too concerned.

Subramanian highlighted four bear case scenarios that should be top of mind for investors, and then debunked each with bullish considerations. Subramanian has been consistently bullish on stocks over the past year, and has a year-end S&P 500 price target of 5,000, representing potential upside of just 1% from current levels.

These are the four bear case scenarios for the stock market, and their bullish counter arguments.

1. "Demand is too weak"

With about half of S&P 500 companies having reported their fourth quarter earnings, the results are not that impressive. While earnings per share has so far jumped 6% year-over-year, revenues rose only 3%, which, when accounting, for inflation is negative.

Mentions of "weak demand" on the earnings conference calls of consumer-focused companies also remains elevated, according to the note, which is not a good sign.

But Subramanian isn't buying it, arguing that leading indicators like Korean exports suggest demand is stabilizing and set for a rebound.

"There are encouraging signs that demand has inflected higher. Manufacturing new orders vs. inventories also suggest we're now in a re-stocking cycle. Margins already started improving and we expect even further improvement once demand starts to improve," Subramanian said.

2. "Layoffs are dominating the headlines"

More and more companies are laying off workers. Snap said it would cut 500 jobs, or 10% of the company on Monday, and a slew of other tech companies, including Microsoft and Alphabet, announced further headcount reductions.

If layoffs accelerate to a meaningful level, it would derail Subramanian's bullish view that demand is starting to pick up.

But Subramanian observed that the recent slew of job cuts are mostly seasonal, and they're 20% smaller this year than they were last year.

"The earnings upcycle that we expect in 2024 suggests that the peak corporate layoff cycle is likely behind us. The job market remains robust," Subramanian said.

3. "Cost of capital will imperil dividends"

New York Community Bancorp sent shockwaves through the regional bank sector last week after it slashed its dividend by 70%.

This plays into the bear argument that corporate cash returns and capital expenditures are at risk unless the Federal Reserve aggressively cuts interest rates.

But Meta's surprise dividend announcement of $0.50 per share more than offsets recent reductions in corporate dividends, according to Subramanaian.

And what's more, the New York Community Bancorp shockwave was idiosyncratic and not systemic, according to the note.

"We believe a domestic investment cycle, combined with an AI investment cycle, will result in a prolonged capex cycle. META's dividend issuance also indicates we are in a total return world with a greater focus on dividends," Subramanian said.

4. "Red Sea/Panama Canal disruptions"

The combination of Houthi attacks against cargo ships in the Red Sea and a drought in the Panama Canal has led to some bears believing a surge in inflation is imminent.

That would be a difficult scenario for the stock market, as any rebound in inflation would likely put the Federal Reserve's planned interest rate cuts on hold.

But Subramanian noted that transportation costs represent just 2% of total operating expenditures for S&P 500 companies, and the shipping disruptions could ultimately jumpstart more manufacturing activities.

"Despite concerns, we believe this could be a tailwind to manufacturing, where the inventory cycle already started to inflect and demand is rising to rebuild inventories ahead of longer lead times and Chinese New Year, similar to the just-in-case inventory management post-COVID," Subramanian said.