Wall Street was growing more bullish in the final weeks before the Nov. 5 presidential election — a contrarian sign that may suggest limited upside for U.S. stocks, according to BofA Global Research.
BofA’s Sell Side Indicator (SSI), which tracks Wall Street strategists’ average recommended equity allocations, in October climbed to its highest level in more than 2½ years (see chart below). The sentiment gauge rose 50 basis points to 56.7% last month, resuming its climb after pausing in September, a team of BofA strategists led by Savita Subramanian, head of U.S. equity and quantitative strategy, said in a Friday client note.
But that may not actually be a good thing for stocks. The BofA team has long touted the SSI as “a reliable contrarian indicator” since an overly bullish sentiment may cause some investors to take an opposite view — when everyone else in the stock market is optimistic, it is often a good time to sell.
“Its current level of 56.7% suggests a price return of 11% for the S&P 500 over the next 12 months, much lower than recent history, but still roughly in line with the market’s annualized return over the past decade,” the BofA strategists wrote.
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