Investors with Positive Equity Views May Be More Selective Than Usual, According to BofA

Bank of America analysts noted in a report that despite a heightened sentiment in the equity markets, investors are displaying selective bullishness, favoring sectors with long-term growth potential while approaching others with caution.

The bank’s Sell Side Indicator (SSI), which measures the average equity allocations recommended by sell-side strategists, remained stable at 56.2% in September, marking the highest level in two and a half years.

While the SSI is currently in “Neutral” territory, it is notably closer to a contrarian “Sell” signal than a “Buy” one, being just 1.8 percentage points away from signaling a sell and 4.9 percentage points from a buy.

The analysts indicated that although sentiment appears to have improved, there is still a degree of wariness surrounding market risks, particularly those associated with the labor market’s health.

Historically, the SSI has proven to be a dependable contrarian indicator, often signaling bullish trends when Wall Street is too bearish and vice versa. Presently, the indicator suggests a potential price return of 11.5% for the S&P 500 over the coming year—a promising figure, albeit lower than recent averages.

Despite this optimistic forecast, Bank of America analysts believe investors will likely remain discerning in their stock selections. They observed that both institutional and individual investors are currently leaning heavily towards technology and growth sectors.

Looking ahead, the bank’s analysis indicates that cyclical stocks may outperform defensive ones, driven by an acceleration in corporate profits. Consequently, they have increased their allocation to materials, anticipating cyclical leadership in the near future.

In summary, Bank of America expressed a preference for cyclical stocks over defensive ones, highlighting their decision to raise materials to an overweight position in their latest report.