While the S&P 500 index surged 8% in October, sentiment toward stocks dipped, as measured by Bank of America’s Sell Side Indicator (SSI).
The Indicator tracks Wall Street strategists’ recommended equity allocation. The SSI slid to 52.8% in October, the lowest level since early 2017, from 53.58% in September.
But the dip is actually good news for stocks, according to BofA. That’s because the SSI is a contrarian indicator.
Historically, when the SSI was at current levels or lower, the subsequent 12-month return for the S&P 500 was positive 94% of the time, versus 82% over the full history, BofA strategists wrote in a commentary. And the median 12-month return was 22%.
“The SSI is one of five inputs into our year-end S&P 500 target of 3,600, and indicates an expected price return of 16% over the next 12 months, or about 4,500 for the S&P 500,” the strategists said. The S&P 500 recently stood at 3,856.
Neutral Territory
Still the SSI is in neutral territory, as opposed to buy or sell, the strategists said. “However, the Indicator is the closest it has been to a buy signal since early 2017 and is closer to a buy than a sell for a sixth consecutive month,” the analysts said.
Strategists’ recommended stock allocation has fallen by more than 6 percentage points so far this year, and the recommended allocation to bonds has gained more than 5 percentage points.
“Stocks are poised to offer healthy long-term returns (our model projects 5% annual price returns over the next decade),” the strategists said.
But, “the rising debate over whether bonds now look more attractive than stocks marks a departure from the post-[2008] financial-crisis era when ‘there is no alternative’ to stocks was the prevailing argument.”
Goldman Sachs Bearishness
Meanwhile, Goldman Sachs expressed pessimism toward stocks Oct. 25, despite The S&P 500’s 8% jump between Oct. 12 and then.
“The broader case for U.S. equities doesn’t look very strong, and the normal conditions for an equity trough are not clearly visible yet,” Goldman Sachs research executives said in a commentary.
“Equities haven’t fully reflected the latest rise in real yields, and any significant easing in financial conditions through higher equities will likely be offset by policy in the end.”
In other words, higher interest rates will ultimately limit gains by stocks.
“U.S. equity valuations do not yet offer a historically large premium to the real returns on offer from bonds and cash, particularly given significant downside if a proper recession occurs or geopolitical risks in Ukraine or elsewhere intensify,” the research executives said.
To be sure, it’s unclear how one compares stock valuations to fixed-income returns. But returns for cash so far this year have far outstripped stock returns.
