BofA’s Indicator Projects S&P 500 at 4400 Over Next 12 Months

By Senad Karaahmetovic

Wall Street strategists are becoming increasingly pessimistic about equities, as observed by analysts from Bank of America.

Historically, this trend could indicate positive outcomes for stocks since the prevailing equity allocations have served as a consistent contrarian indicator, according to the strategists’ insights shared in a recent client report.

The Bank of America’s Sell Side Indicator (SSI), which measures the average recommended stock allocations by U.S. sell-side strategists, currently sits in ‘Neutral’ territory with a reading of 53%.

"At the start of the year, the indicator was just one percentage point away from signaling a ‘Sell,’ but by year-end, it was a mere 1.5 percentage points from a ‘Buy’ signal, the closest it has reached to ‘Buy’ since 2017," the strategists noted.

Bank of America anticipates a year-end target of 4,000 for the S&P 500. However, the current SSI indicates that the S&P 500 could potentially see a price return of approximately +16% over the next year, suggesting a target of around 4,400.

"When the SSI has been at these levels or lower in the past, the S&P 500 has recorded positive returns 95% of the time over the following 12 months, compared to 81% when considering the entire history. The median return for the subsequent year was +21%," they added.

The strategists emphasize the significant drop in market sentiment as a key factor driving Bank of America’s more optimistic outlook on stocks for 2023.

"The average stock allocation declined by 6 percentage points in 2022 as the S&P 500 experienced a 19% drop. Meanwhile, bond allocations increased by 6 percentage points to 34%, resulting in the lowest stock-to-bond allocation ratio since 2016 at 1.6 times, compared to an average of 1.8 times post-financial crisis. Additionally, Bank of America’s Global Fund Manager Survey indicates that investors’ relative positions in stocks versus bonds have reached their lowest point since 2009. However, this shift may be warranted, given the diminished appeal of stocks compared to bonds," the strategists concluded.