This stock market signal points to the S&P 500 surging 25% within the next year

• There's still significant upside potential in the stock market, according to Bank of America.
• The bank said the S&P 500 could surge 25% within the next year based on a bullish indicator.
• "Analyst consensus long-term growth expectations today suggest big gains," BofA's Savita Subramanian said.

The S&P 500 could surge more than 25% over the next 12 months based on a bullish stock market indicator that measures sentiment among Wall Street analysts, according to a Friday note from Bank of America's Savita Subramanian.

Subramanian observed that long-term profit growth expectations among Wall Street analysts are near record low levels, which signals pervasive pessimism. Typically, when there's such a high level of pessimism towards future corporate profits, the stock market delivers spectacular returns.

"Valuation is a powerful long-term forecasting tool, but sentiment has been more predictive of near-term returns, and analysts consensus long-term growth expectations today suggest big gains," Subramanian said. "Forecast long-term growth plummeted from 2022, [and] sits near COVID lows."

Wall Street currently expects total long-term profit growth of about 7% for the S&P 500, which is at similar levels seen during March 2020 and March 2009, two periods when stocks delivered outsized gains over the following year.

Analysts expected the S&P 500 to deliver long-term profit growth of 11% a year ago, while the trailing 5-year level of growth has been 12%.

Just as low long-term profit expectations among Wall Street analysts has proven to be a bullish indicator for stocks, elevated growth expectations has proven to be a bearish signal for stocks.

"Low long-term growth [expectations] has been bullish. In fact in November 2021, we cited lofty expectations as a bearish set-up, given the strong inverse relationship between long-term growth and future S&P 500 returns," Subramanian said. The stock market went on to enter a year-long bear market just a couple months later.

The bullish stock market setup, as suggested by this contrarian sentiment indicator, is being driven by analysts expecting a sizable slow-down in profit growth for nearly all sectors, including energy. But Subramanian disagrees.

"Energy companies have newfound supply discipline. Oil supply is constrained in general," Subramanian argued, suggesting that oil companies will be able to navigate any potential decline in the price of oil.

And there are reasons to believe that profit growth can beat analyst expectations going forward, according to the note, including a renewed corporate focus on efficiency, "which is bullish for margin preservation."

"Capex is strong, and if communication services is going to grow even close to 2x as fast, incremental grid/infrastructure spend are necessary and should benefit energy, metals, utilities, and even retail (stickier wage growth," Subramanian said.