Brendan McDermid/Reuters
- Investment pros on Wall Street are now more bearish on stocks than they were during the 2008 crisis.
- Sentiment data from Bank of America shows equity allocations among Wall Street market strategists has fallen below 53%.
- "It has been a bullish signal when Wall Street strategists were extremely bearish," BofA said.
Investment pros on Wall Street are getting more and more bearish on US stocks, according to a Monday note from Bank of America, but that downbeat mood could be flashing a big signal to investors that it's time to buy.
In fact, Wall Street strategists are now more bearish on stocks than at any point since the Great Financial Crisis in 2008 and 2009, according to the note.
The bank's sell side indicator surveys a group of investment strategists about their investment allocation recommendations towards stocks, bonds, and cash. In the past, the indicator has served as a reliable contrarian signal as to when to buy or sell stocks.
"It has been a bullish signal when Wall Street strategists were extremely bearish, and vice versa," Bank of America's Savita Subramanian said.
Right now, the indicator suggests a contrarian "buy" signal for stocks is on the verge of flashing. The indicator dropped to 52.7%, below the 53% lows seen in March 2009. The indicator needs to fall an additional 1.3 percentage points to trigger a contrarian "buy" signal, according to the note.
But even if the indicator doesn't fall further, it could still signal that the stock market is set up for solid gains ahead.
The current level of BofA's sell side indicator suggests the S&P 500 will surge 16% over the next 12 months, which would put the S&P 500 at its prior record high of about 4,800.
"Historically, when the sell side indicator has been as low or lower, subsequent 12-month S&P 500 returns were positive 94% of the time (vs 81% overall) with a median 12-month return of 22%," Subramanian said.
As to what's driving investment strategists bearish stance, it's likely the recent collapse of Silicon Valley Bank and concerns that the next financial crisis is lurking right around the corner, according to the note. But if those worries don't materialize, it sets the stock market up for big gains ahead as much of the bad news is already priced in.
"The sell side indicator has shed 7 percentage points from peak levels of bullishness in 2021 and this quick, sharp decline in sentiment since 2021 argues that reasons to worry about stocks are well-aired and that a positive surprise is more likely than a negative surprise," Subramanian said.