BofA Indicator Is Closest to Saying ‘Buy’ US Stocks Since 2017

(Bloomberg) — A Bank of America Corp. contrarian indicator based on Wall Street strategists’ allocation views is nearest to flashing “buy” US equities in more than five years.

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“The indicator is the closest it has been to a ‘Buy’ signal since early 2017 and is closer to a ‘Buy’ signal than a ‘Sell’ signal for a sixth consecutive month,” strategists including Savita Subramanian wrote in a note dated Nov. 1. “Wall Street’s consensus equity allocation has been a reliable contrarian indicator over time.”

The bank’s equity-sentiment measure, called the Sell Side Indicator, is one of the inputs that has gone into setting its S&P 500 target at 3,600 for this year and signals the equity gauge can rise to 4,500 over the next 12 months, they wrote. The stocks benchmark closed at 3,856.10 on Wednesday.

Whenever the indicator was at current levels or lower, the subsequent 12-month returns for the US equity index were positive 94% of the time — with median gains of 22%, the strategists said.

The chants of a dovish turn in Federal Reserve’s policy have grown louder ahead of a Federal Reserve rate decision scheduled this week. The optimism has helped the S&P 500 Index rebound about 8% since Oct. 12, when it closed at the lowest level since November 2020.

So far it looks like investors’ hopes of a friendlier Fed will get dashed again as chair Jerome Powell is poised to carry out a fifth-straight outsized rate hike on Wednesday.

The average recommended stock allocation among Wall Street analysts has dropped by more than 6 percentage points this year, while the proposed proportion for bonds has increased by about 5 percentage points, BofA’s Subramanian and team said.