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History says that when investors are as bearish on stocks as they are now, big gains are in store, according to BofA.
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Bearish stock allocations are a strong contrarian indicator of future gains.
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The S&P 500 posted gains over the next 12 months 94% of the time when investors were this pessimistic.
Investors are so bearish on stocks that they could actually boost the market further, with the S&P 500 potentially rising 16% over the next year, according to Bank of America.
“We see reasons for stocks to rise rather than negative sentiment,” sell-side strategists said in a note Thursday, pointing to growing investor pessimism toward stocks in recent months.
In May, Wall Street strategists reduced their equity exposure by 6.6%, while increasing their bond exposure by 6.4%.
But it could reflect big gains ahead, as the downtrend is a contrarian indicator of the future upside. Given the current level of investor decline, the S&P 500 could end the year at 4,600 and hit 4,900 in the next 12 months, according to the bank’s sell indicator, implying a 16% upside of the benchmark over the coming year.
The S&P 500 has seen gains over the next 12 months 94% of the time investors have been this bearish in the past, the note adds, with a median return of 21%.
This indicator coincides with other bullish factors. On the one hand, more and more companies are focusing on efficiency, for example by implementing artificial intelligence in their operations. That could potentially boost production as well as investor returns, the strategists said.
Interest rates could also soon fall as the Federal Reserve brings inflation under control, the strategists added, which will complement stock market gains.
The S&P 500 is up about 10% year-to-date, despite a series of bank failures, recession fears and a fight against the US debt ceiling.
Read the original article on Business Insider