Wall Street’s bearishness may offer another reason to buy, says BofA, as stocks rally

U.S. stocks are rallying, but Wall Street seems to be crowded with bears. 

Bank of America’s sell side indicator, which tracks US sell side strategists’ average recommended allocation to stocks, extended its slide in May, down 22 basis points to 52.5%, analysts at Bank of America wrote in a Thursday note.

The indicator has sent a contrarian, bullish signal to the U.S. stock market, according to the note. The sell side indicator has been “a reliable contrary indicator”, meaning that it sends a bullish signal when Wall Street strategists are extremely bearish, and vice versa, the analyst noted. 

The indicator is now in “Neutral” territory, but only 1.1 percentage point away from triggering a “Buy” signal, according to the note. 

The sell side indicator is close to trigger a “Buy” signal.

BofA Global Research

Historically, when the indicator was at current levels or lower, the S&P 500’s returns over the subsequent 12 months were positive 94% of the time, while the median 12-month return was 21%, according to the note. 

The Bank of America analysts added that they see other reasons to be bullish on stocks in addition to the fact that investors are mostly pessimistic.  

“A newfound corporate focus on efficiency (automation, doing more with less through AI) could drive productivity gains, and investors tend to pay higher multiples for permanent cost reduction,” the analysts wrote. 

Meanwhile, sell-side strategists increased their recommended bond allocation by 22 basis points in May, according to the Bank of America analysts.

It builds on the the dramatic shift in the allocations between bonds and equities since December 2021, after which equity allocations went down -6.6 percentage points while bond allocations increased 6.4 percentage points, the analysts said.

U.S. stocks rallied Friday. The Dow Jones Industrial Average

jumped 600 points, or 1.8%, on track for its largest daily point gain since January. The S&P 500

gained 1.3% and the Nasdaq Composite

advanced 0.9%.