With stocks sitting near all-time highs, some experts warn that market sentiment is getting frothy. Historically, when sentiment peaks, stocks start to sell-off.
Bank of America Merrill Lynch’s Savita Subramian agrees that sentiment has improved. But she argues that they are far from those dangerously bullish levels.
“Even though the S&P 500 has already risen 10% in the six months since sentiment bottomed, history suggests that rising markets can persist for years after sentiment troughs,” writes Subramanian in a new note to clients. “Some have argued that our measure of sentiment, which is based on sell side strategists’ equity allocation recommendations, does not adequately capture today’s bullish market sentiment, as evidenced by the recent surge in equity inflows and rising stock prices.”
Here’s a look at where BAML’s popular proprietary indicator. It’s still bullish for stocks.
Subramanian expands on two reasons why she still thinks sentiment isn’t very bullish.
1) Sell-side strategists aren’t bullish
“While 13 of the 15 strategists contributing targets to Bloomberg’s strategist poll at the start of the year were forecasting that the S&P 500 would end the year higher in 2013, the average implied upside was less than 5%, below the 50-year average price return of 7% and the lowest forecasted upside in eight years. In fact, following the market’s recent rally, the forecasted upside for the rest of the year has fallen to only 1%. This corroborates the subdued sentiment reading from the Sell Side Indicator.”
2) Equity inflows have been big, but not big enough to offset years of outflows
“Despite record inflows into equity long-only funds this year, it has not been enough to offset capital outflows over the past several years. As a result, equity long-only funds remain one of the only asset categories to have negative cumulative inflows over the past three years.”
Subramanian sees the S&P 500 ending the year at 1,600.
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