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Bank of America’s Sell Side Indicator (SSI), which tracks the average recommended allocation to stocks by US sell-side strategists, is down to 54.6% in June from 55.0% in May.
This marks the first time that the SSI has dropped for six consecutive months since 2008, as per BofA’s strategist Savita Subramanian.
“Wall Street’s consensus equity allocation has been a reliable contrarian indicator. In other words, it has been a bullish signal when Wall Street strategists were extremely bearish, and vice versa. The indicator remains in “Neutral” territory, a less predictive range than the more extreme “Buy” or “Sell” thresholds. However, the SSI is closer to a “Buy” signal than a “Sell” signal for the second straight month (3.0ppt vs. 4.6ppt) and is the closest it has been to a “Buy” signal since October 2019. When the SSI was this close or closer to “Buy”, subsequent 12-month returns were positive 96% of the time,” Subramanian told clients in a note.
The decline in investor sentiment is a result of aggressive central bank actions, persistent inflation, as well as mounting recession fears. BofA estimates a 40% chance of a recession next year.
The SSI implies the S&P 500 trading around 4300 over the next 12 months, which would suggest returns of roughly 14%. BofA’s official target for the S&P 500 is 4500 while the recession low could be somewhere around 3000.
“Historically, when the SSI was at current levels or lower, subsequent 12-month S&P 500 returns were positive 94% of the time (vs. 83% over the full history) and the median 12-month return was 20%,” Subramanian concluded.
