Wall Street sentiment creeps toward 'sell' as risk appetite builds, says BofA

Wall Street strategists are keeping their equity allocations largely unchanged, but Bank of America’s Sell Side Indicator (SSI) is edging closer to a contrarian "sell" signal, hinting that investor optimism may be running ahead of fundamentals.

The bank's SSI (a gauge of average recommended equity exposure among sell-side strategists) ticked up by just 10 basis points in July to 55.7%, according to a report from Savita Subramanian, head of U.S. equity and quantitative strategy at BofA. While the signal remains in “neutral” territory, it now sits only 2.1 percentage points away from flashing a “sell,” compared with 4.5 points from “buy.”

Bank of America's Sell Side Indicator held steady in July (Bank of America Securities)

Strategists largely held their ground last month as the Standard & Poor’s 500 stock index (SP500 [https://seekingalpha.com/symbol/SP500]) gained 2%, balancing upbeat second-quarter earnings with concerns over elevated valuations and the looming Aug. 1 tariff deadline.

“The SSI has been a reliable contrarian indicator. In other words, it has been bullish when Wall Street was extremely bearish and vice versa,” Subramanian said in the Aug. 1 report.

Despite the move toward “sell,” the current reading remains below levels historically associated with market peaks, such as 59% in 2000, 64% in 2007 and 59% in 2022. At 55.7%, the indicator implies a 12% return for the S&P 500 (SP500 [https://seekingalpha.com/symbol/SP500]) over the next 12 months, one of several factors feeding into BofA’s broader market outlook.

However, other signs suggest rising speculative fervor. BofA highlighted a resurgence in meme stocks, strong micro-cap performance and record-high increases in risk appetite captured in its latest fund manager survey. Cash allocations have fallen, although overall equity overweight positions are not yet at extreme levels.

Against this backdrop, BofA continues to favor large-cap value stocks, which it sees as under-owned, attractively priced and better positioned for a potential correction due to improved balance sheet discipline compared to growth stocks.

“We don't think we have hit broad-based euphoria yet….other signals point to pockets of speculative froth,” Subramanian said, adding that a tilt toward large-cap value remains the firm’s preferred hedge in a market that’s inching toward overconfidence.

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