Bank of America says that equity sentiment has declined for the first time since May, which coincides with the S&P 500 breaking below key support.
The bank’s Sell Side Indicator (SSI), which is a contrarian sentiment gauge that tracks sell-side strategists' average recommended allocation to equities in a balanced fund, declined by 37 basis points in the last month to 53.1%.
This is the first decrease in equity sentiment since May and the most significant month-on-month drop since October.
“The current SSI level indicates +15.5% price return over the next 12 months (S&P 500 at ~4850),” the analysts said.
BofA's SSI has historically been a reliable contrarian indicator, suggesting bullish signals when Wall Street sentiment is extremely bearish, and vice versa, the analysts remind investors.
Although the current indicator is within the "Neutral" range, which is less predictive than the more extreme "Buy" or "Sell" thresholds, it is considerably more bearish than bullish.
SSI is nearly three times closer to a "Buy" signal than a "Sell," with a 1.8ppt difference compared to a 5.0ppt difference.
“Historically, when the indicator has been here or lower, 12m forward S&P 500 returns were positive 95% of the time (vs. 81% overall) with a median return of 21%,” the analysts added.
In the past month, the average cash allocation among strategists increased by 56 bps. This shift was primarily funded by reducing allocations to equities (a decrease of 37bp) and bonds (a decrease of 18bp).
Still, cash allocations are still near historic lows, ranking in the 15th percentile of the survey history. Bond allocations, on the other hand, remain elevated, standing in the 90th percentile.
“While higher rates have weighed on equity sentiment, we believe corporates and consumers may hold up better than expected as they have time to adapt – over 75% of S&P 500 debt is longterm fixed (vs. <50% in 2008), and only 15% of US mortgage loans are adjustable-rate,” the analysts concluded.