One Bullish Factor Could Drive 16% Upside

  • Despite the very bearish stock market commentary for 2023, there is still one factor that could push the upside.
  • Bank of America’s bull case scenario sees the S&P 500 rise 16% to 4,600 by the end of 2023.
  • “Wall Street is bearish, which is bullish,” BofA spokeswoman Savita Subramanian said in its 2023 report.

Bank of America says Wall Street’s view of the stock market in 2023 is overwhelmingly bearish, but could ultimately be a bullish factor fueling a turnaround in stock prices.

Several equity strategists at Morgan Stanley, Bank of America and Deutsche Bank have suggested the S&P 500 could fall as low as 3,000 sometime next year, representing a potential decline of about 26% from current levels.

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Even Bank of America equity strategist Savita Subramanian said in her 2023 outlook that the base case is a year of solid returns as investors grapple with a potential economic slowdown, stubbornly high inflation and liquidity risks from the Federal Reserve’s balance sheet reduction policy.

But in Subramanian’s bull scenario, the S&P 500 could rise 13% to 4,600 by 2023 on the idea that Wall Street is too bearish.

“Wall Street is bearish, which is bullish,” she said, pointing to BofA’s Sell Side sentiment indicator, which is close to a buy signal. BofA’s proprietary indicator measures sentiment among a group of Wall Street equity strategists and has a strong track record of marking a stock’s highs or lows.

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When Wall Street is too cheap for a stock, it usually happens around the top of the stock market, and vice versa when it is too bearish.

“The sell-side indicator is down more than 6 percentage points year-to-date to 52.8%, which is closer to a ‘Buy’ signal than a ‘Sell’ signal, but still in ‘neutral’ territory. This level represents a price return of 16.2% in the next 12 months,” Subramanian explained.

A “buy” signal would be generated if the sell-side indicator falls 1.3% from current levels to 51.5%, according to the note, which could happen in January if the year-to-date continues.

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“Historically, when the sell-side indicator was at or below current levels, the trailing 12-month return of the S&P 500 was positive 94% of the time, and the average 12-month return was 22% of the time,” she said.

Contrarians are hard to time and don’t always work, as evidenced by the overly bearish investor sentiment seen throughout the year and the continued decline in stock prices. But when investor sentiment reaches extremes, such as it is on the brink of, based on BofA’s sell-side indicator, investors should pay attention.


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