'Wall Street is bearish, this is bullish': BofA's indicator sees S&P 500 at 4400 over next 12 months

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By Senad Karaahmetovic 

Wall Street strategists are getting increasingly bearish on equities, according to Bank of America's equity strategists.

This could be bullish for stocks as the consensus equity allocation has been "a reliable contrarian indicator" historically, the strategists wrote in a client note.

Bank of America's Sell Side Indicator (SSI) - which tracks the average recommended allocation to stocks by U.S. sell-side strategists - is in 'Neutral' territory with a reading of 53%.

"Although the indicator started the year within 1ppt of a "Sell" signal, it ended the year only 1.5ppt from "Buy," the closest it has been to "Buy" since 2017," the strategists added.

Bank of America has 4000 as its year-end target for the S&P 500. However, the SSI suggests the S&P 500 could see "an expected price return of +16% over the next 12 months (~4400 for the S&P 500)."

"Historically, when the SSI was at current levels or lower, subsequent 12m S&P 500 returns were positive 95% of the time (vs. 81% over the full history) and the median 12m return was +21%," the strategists added.

They highlight the "big drop in sentiment" as one of the key reasons why BofA is getting more constructive on stocks in 2023.

"The avg. recommended allocation to stocks declined by 6ppt in 2022 as the S&P 500 dropped 19%. Meanwhile, the avg. recommended allocation to bonds rose by 6ppt to 34%, bringing the ratio of stock vs. bond allocations to its lowest level since 2016 at 1.6x (vs. post-GFC avg. of 1.8x). Similarly, BofA's Global Fund Manager Survey shows that investors’ relative positioning in stocks vs. bonds is at its lowest level since 2009. But the move may be justified, given that the relative attractiveness of stocks vs. bonds has been wiped out," the strategists concluded.