Stocks were the only major asset class that gained in the first quarter, but Bank of America says 'anemic' returns may be on the horizon

• Stocks were the only major asset class to post gains in the first quarter, according to Bank of America.
• All 11 equity sectors saw gains with energy, financials, and industrials leading the way.
• BofA's Sell Side Indicator shows "anemic" returns could be on the horizon.

Stocks were the only major asset class (not including cryptocurrencies) that saw gains in the first quarter of 2021, but according to Bank of America's sentiment indicators, "anemic" returns may be on the horizon.

In a note to clients last week Bank of America analysts reviewed the performance of all major asset classes in the first quarter.

The analysts found that stocks were the lone bright spot so far this year. All 11 equity sectors posted gains through the end of March, with cyclicals leading the charge.

The energy (+29.3%), financial (+15.4%), and industrial (+11.0%) sectors were the best performing groups, posting double-digit gains in the period, while the utilities (+1.9%), tech (+1.7%), and consumer staples (0.5%) sectors performed the worst.

The S&P 500 rose 6.2% in the quarter to record highs of over 4,000.

Bank of America said the rise in stocks was mainly due to "unprecedented monetary and fiscal stimulus," which allowed "low-quality" stocks (those rated "B" or lower in S&P quality rankings) to outperform "high quality" stocks (those rated "B" or better).

The stimulus also led to a rotation away from highly valued tech names and into value plays. According to Bank of America, the first quarter "marked the biggest rotation into Value since 2001."

Despite the strong performance from equities, Bank of America warned of dangerous "euphoric sentiment" in the markets.

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According to the firm's Sell Side Indicator, a contrarian gauge of Wall Street sentiment, optimism over the past twelve months has risen three times the typical rate following bear markets since 1985.

Bank of America's sentiment indicator is now at a 10-year high and the closest it's been to a contrarian "sell" signal since May 2007.

When the "sell" signal flashed over a decade ago, the S&P declined 13% in the following 12 months.

Bank of America recommended clients stay invested, but "go up in quality" to names with stronger balance sheets and less debt.

The investment bank said clients should focus on investments in areas sensitive to "the real economy" like cyclicals, industrials, and small caps stocks amid record fiscal stimulus and President Biden's new infrastructure plan.