The bull market in stocks still has more upside ahead because investors aren't feeling euphoric yet, BofA says
- The lack of euphoric vibes among investors suggests the stock market has more upside ahead.
- Bank of America's Savita Subramanian said that sentiment on Wall Street is still subdued.
- "We don't see levels of euphoria that bull markets typically end with," Subramanian said.
There is a lack of euphoria on Wall Street, and that suggests to Bank of America equity strategist Savita Subramanian that there could be more gas in the tank for the current bull market in stocks.
The bank's proprietary Sell Side Indicator tracks the equity allocation recommendations of Wall Street strategists, and right now it is nowhere near the bullish levels that would fire a contrarian "Sell" signal, according to a Thursday note from Subramanian.
"Sentiment has warmed vs. last year, but we don't see levels of euphoria that bull markets typically end with," Subramanian said.
The Sell Side Indicator ticked down 24 basis points in January to 54.4%, which is in "Neutral" territory and is well below the 59.8% peak it hit in 2021. And stocks tend to see solid returns when the indicator is stuck in the Neutral zone.
"The SSI's current level indicates an expected price return of +14% over the next 12 months or 5,450 for the S&P 500 by year-end 2024. When the SSI has been here or lower, 12-month forward S&P 500 returns were positive 94% of the time (vs. 81% overall) with a median return of 20%," Subramanian said.
There are plenty of macro concerns fueling the subdued outlook for stocks on Wall Street, according to the note, including weak economic growth in China, heightened geopolitical tensions, and uncertainty surrounding the Federal Reserve's expected interest rate cuts.
"Few investors appear positioned for a macro recovery," Subramanian said, observing that exposure to risk-on stocks like cyclicals, small caps, and high beta stocks is low relative to history.
All of this plays into a quote about the life cycle of bull markets from famed investor Sir John Templeton: "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria."