The S&P 500 could return 16% in 2023 as a contrarian indicator sends bullish signals, says Bank of America

• Bank of America's Sell Side Indicator is nearing a "Buy" signal, as Wall Street sentiment remains bearish on stocks.
• The indicator is part of the firm's forecast for 16% returns in the S&P 500 in 2023.

As Wall Street remains bearish, one of Bank of America's key contrarian indicators is giving reason for optimism.

BofA's Sell Side Indicator, which tracks strategists' average recommended allocation for stocks, is nearing a "Buy" signal, and is part of the firm's view for 16% returns in the S&P 500 in 2023.

Historically, when the indicator has been at this level or lower, the subsequent 12 months brought positive returns 95% of the time, analysts wrote in a Tuesday note.

Typically, Wall Street's consensus equity allocation has been a reliable contrarian indicator, BofA analysts noted. It currently remains in "Neutral," but that balance appears to be tilting.

"Although the indicator started the year within 1ppt of a 'Sell' signal, it ended the year only 1.5ppt from 'Buy', the closest it has been to 'Buy' since 2017," according to Bank of America.

In 2022, the average recommended allocation to stocks fell by 6 percentage points, and the S&P 500 shed more than 19%. At the same time, the average allocation advised for bonds rose by 6 percentage points to 34%, which brought the stock-to-bond recommended allocation to its lowest level since 2016.

Meanwhile, BofA's Global Fund Manager survey revealed that investors' relative positioning in stocks versus bonds is at its lowest level since 2009, which analysts said gives them more reason to be constructive on equities for the new year.

In the note, BofA analysts pointed out that Wall Street recommended underweighting equities through the bull market of the 1980s and 1990s, as well as the 2009-to-2020 bull market.