BANK OF AMERICA: Wall Street bullishness gauge spikes most in 2 years, signalling a 11% gain for S&P 500 within a year

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  • Wall Street bullishness surged the most in two years last month as economic reopenings lifted investor optimism,Bank of America said Wednesday.
  • The firm’s Sell Side Indicator gained to 55.8% from 54.9% in June, a sizable increase but still “far from the euphoria one sees at the end of bull markets.”
  • The reading also implies an 11% return for the S&P 500 over the next 12 months, the bank’s strategists added.
  • The gauge’s “buy” and “sell” thresholds shrank to their narrowest gap in nearly two decades, according to the bank. Such a trend could form a bias against equities and create cheap dividend opportunities in the stock market.
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Bank of America’s Sell Side Indicator notched its biggest increase in roughly two years as economic reopenings boosted risk appetites.

The gauge of Wall Street bullishness jumped to 55.8% from 54.9% in June, bringing the metric just 0.3 percentage points below its 15-year average. The update implies an expected S&P 500 return of 11% over the next 12 months and factors into the firm’s year-end target for the benchmark index.

Though the leap signals an optimistic shift among investors, stock market emotions are still fairly lukewarm, the bank said.

“This indicator is the most bullish of our five target models and continues to indicate that sentiment on stocks is still tepid, far from the euphoria one sees at the end of bull markets,” the team led by Savita Subramanian wrote in a Wednesday note.

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Recent price activity backs up such observations. After rallying hard through May, stocks ended June only slightly above where they began. Fears of a second wave of coronavirus and dried-up stimulus measures pushed investors back to safe havens.

The trend also rears its head in the closing gap between “buy” and “sell” thresholds. Both thresholds had been falling for years, and the coronavirus pandemic has since shrunk the gap to its narrowest in nearly two decades, the strategists said. The shift is likely a result of yield scarcity, the pandemic’s hit to retirement assets, and a “hot stove” mentality toward equities, they added.

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Still, the mild optimism creates a strong buying opportunity for US stocks. The Federal Reserve indicated in June that the current low-rate environment could last through 2022 to usher in a robust economic recovery. Such policy, when coupled with a growing bias against stocks, will allow investors to buy into safe dividend yield at low prices, Bank of America said.

“The dividend yield of the S&P 500 is now at a multi-decade record multiple of bond yields, and whereas the sustainability of dividends has come into question amid the recession, we think a significant proportion of the S&P 500 offers sustainable dividend yields,” the team wrote.

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