Wall Street's confidence in the stock market is the lowest in 5 years as markets price in an 80% chance of a mild recession, Bank of America says

• Wall Street is bracing for a recession, according to Bank of America analysts.
• BofA's Sell Side Indicator hit its lowest point in over five years, which indicates sinking investor sentiment.

Wall Street is feeling the most downbeat about the stock market in years, according to Bank of America analysts, and investors are getting ready for a recession.

In a Wednesday note, analysts wrote that the bank's Sell Side Indicator has plummeted to its lowest mark in over five years. The metric, which tracks the average recommended allocation of stocks by sell-side strategists, slipped 78 basis points in July.

"We have found that Wall Street's consensus equity allocation has historically been a reliable contrarian indicator," BofA analysts wrote. "While the SSI does not catch every rally or decline in the stock market, the indicator has historically had some predictive capability with respect to subsequent 12-month S&P 500 total returns."

In the past, Wall Street's consensus equity allocation has been able to signal the opposite of what strategists recommend, meaning it's been a bearish indicator when analysts were bullish, and vice versa.

Now, the Sell Side Indicator has hovered in "neutral" territory through the first half of the year, but is now inching closer to "Buy" after recent declines.

Meanwhile, analysts noted the Equity Risk Premium has been rising, suggesting markets are pricing in an 80% chance of a mild recession, and a 30% chance of a "full-blown" downturn.

The moves of these key indicators align with the bank's expectations for a mild recession to hit in the second half of 2022, analysts noted.

The US just recorded two consecutive quarters of negative growth — the technical definition of a recession — and analysts added that corporate sentiment during earnings calls has soured while talk of weak demand is growing.