U.S. stocks slipped into the new year with a sharp decline that underscores the caution that most Wall Street strategists advise. But to market analysts of Bank of America Merrill Lynch, Wall Street’s skepticism and recommendation that investors stay relatively light on stocks is a bullish sign.
The firm’s proprietary “Sell Side Indicator” — the average recommended equity allocation of Wall Street strategists — remained unchanged and squarely in “buy” territory in December, with Wall Street sages suggesting that investors commit 53.3% of their portfolio to U.S. stocks.
With Wall Street’s bearishness as extreme as it was at the market lows of March 2009, the Sell Side measure currently indicates an 18% gain for the S&P 500 over the next 12 months, including dividends . Historically, when the indicator has been at such a pessimistic level, total U.S. stock returns over the following 12 months have been positive more than 95% of the time.
This contrarian sentiment gauge has been bullish since April 2012, and though Wall Street’s sentiment has improved in 12 of the last 17 months, it’s nowhere near the 60% to 65% portfolio weighting that strategists typically give to stocks. The Sell Side Indicator currently would give a “sell” signal when strategists up their recommended stock weighting to 66%.
Notes Savita Subramanian, Bank of America Merrill Lynch equity & quant strategist: “Even though the S&P 500 has risen by over 30% since sentiment bottomed [in July 2012], history suggests that strong equity returns can last for years after the indicator troughs.”