(Bloomberg TV)
Savita Subramanian.

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.

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