BofA Stocks Indicator Sees S&P 500 Surging 16% in Next 12 Months

(Bloomberg) — Wall Street’s outlook for US stocks remains near a six-year low even after surging last month, a contrarian sign that suggests brighter times ahead, according to Bank of America Corp.

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BofA’s Sell Side Indicator, which tracks sentiment toward US equities on a monthly basis based on asset-allocation recommendations provided to the bank and Bloomberg, rose 0.33 percentage point to nearly 53% in June. It was the biggest monthly increase since November for the sentiment reading, and it coincided with a 6.5% June rally for the S&P 500 Index, its best month since October.

With analysts remaining largely bearish, that pessimism provides a favorable backdrop for US stocks. The sentiment indicator has hovered within 2 percentage points of a contrarian “buy” signal for the past year, with the current level indicating 16% price return over the next 12 months, according to the bank’s analysis. That would leave the S&P 500 trading at 4,800 by year-end, or 5,200 a year from now, BofA data show.

“Wall Street’s consensus equity allocation has been a reliable contrary indicator,” Savita Subramanian, an equity and quant strategist at the bank, wrote in a note to clients this week. “In other words, it has been a bullish signal when Wall Street strategists were extremely bearish, and vice versa.”

While the S&P 500 rallied 16% in the first half of 2023, BofA says its sentiment index barely budged, and is 0.16 percentage point below where it started the year.

Bears point to concerns that the Federal Reserve will derail the rally, along with worries over Big Tech’s role in driving the gains. Stocks have far surpassed Wall Street’s expectations for 2023. At the start of the year, strategists forecast that the S&P 500 would be flat this year, and now anticipated that it will finish the year about 8% below Wednesday’s close.

Skeptics such as Morgan Stanley’s Mike Wilson and JPMorgan Chase & Co.’s Marko Kolanovic predict the latest leg up in stocks will be short-lived, in part because the Fed is signaling further tightening. And BofA’s Michael Hartnett sees this year’s rebound running out of steam.

But strategists including Subramanian say worries over Big Tech are overblown.

“Strategists appear hesitant to shift allocations amid mixed macro signals,” according to Subramanian. “Although some investors have recently turned more bullish given AI, we believe a broader case for stocks can be made.”