Optimism towards US stocks is now the highest that it’s been in six years, at least among sell side analysts.
Bank of America-Merrill Lynch’s (BAML) sell side indicator — a measure of Wall Street’s bullishness on stocks — rose by 2.4 points to 56.4 in June, leaving it sitting at the highest level since 2011.
As the name implies, sell side analysts sell ideas to current or perspective clients.
BAML says the indicator is based on the average recommended equity allocation of Wall Street strategists at the end of each month. While it’s not its official forecast, strategists at the bank say the indicator currently points to a 12-month return of 10%, leaving the index sitting at 2,673 points.
“Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 93% of the time, with median 12-month returns of 19%,” it says, adding that “past performance is not an indication of future results”.
While sentiment is now the highest that it’s been since 2011, as seen in the chart above from BAML, the recent spurt of enthusiasm has only seen indicator move back into what it deems to be “neutral” territory, having sat in “bearish” territory for the best part of five years.
And, over this period, there were stellar gains on the market, leading BAML to suggest that it’s a reliable contrarian indicator on how stocks will perform in the future.
“It has historically been a bullish signal when Wall Street was extremely bearish, and vice versa,” strategists at the bank wrote.
Although, at a “neutral” level, the indicator isn’t providing a buy or sell signal, BAML says the recent lift from pessimism to optimism may be a signal as to what will happen in the period ahead.
“The recent inflection from scepticism to optimism could be the first step toward the market euphoria that we typically see at the end of bull markets and that has been glaringly absent so far in the cycle,” it says.
So one final hurrah, a blow-off top of sorts sending the S&P further skywards, could be on the way before the bull market that began in 2009 peters out.
No one knows whether that will eventuate, but confidence among sell side analysts on the street could provide an early indicator.