After ripping higher last year, US stocks continued that form in the first session of 2018.
The Nasdaq Composite and S&P 500 both closed at record highs, adding 1.5% and 0.83% respectively.
This chart may help to explain why – Wall Street analysts haven’t been this bullish towards stocks in over six years:
From Bank of America Merrill Lynch (BAML), it’s the bank’s Sell Side Indicator, a measure that takes the average recommended equity allocation of Wall Street strategists to determine their bullishness on stocks.
BAML says that it has been a reliable contrarian indicator in the past, providing a bullish signal when Wall Street was extremely bearish and a bearish signal when the street was overly bullish.
So what is the indicator telling us at the start of 2018?
BAML says that while current levels of enthusiasm haven’t generated a sell signal just yet, that could well change by early next year should recent trends be maintained.
“The rapid improvement in equity sentiment over the last 16 months has continued to push the indicator further into ‘neutral’ territory. And while we are still a long way off from the current ‘sell’ threshold of 62.8, at the current pace, we could reach those levels by January 2019,” it says.
While over the medium-term it suggests there’s a growing risk of a downturn, over the near-term, BAML says the indicator points to another strong year for stocks in 2018.
“The S&P 500’s indicated dividend yield currently near 2% implies a 12-month price return of 10% and a 12-month value of 2935,” it says, equating to a 12% return over the next 12 months.
The S&P 500 index currently sits at 2,695.81 points.
It adds that when the indicator has been this low or lower in the past, “total returns over the subsequent 12 months have been positive 93% of the time, with median 12-month returns of 19%.”
While history suggests that there’s plenty of near-term upside to come, BAML somewhat wisely adds that “past performance is not an indication of future results”.
As for its official end-of-year forecast, BAML is looking for the S&P 500 to sit at 2,800 points.
“Optimism was building [in 2017], and we think 2018 could be the year of euphoria,” it says.
“We think sentiment will be a more important driver of returns in 2018, and drives the bulk of our market call.”
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