Equity Allocation is at 2-year Lows

By Senad Karaahmetovic

Bank of America strategist Savita Subramanian reflected on the investor sentiment after “choppy” trading in May.

The firm’s Sell Side Indicator (SSI), which tracks the average recommended allocation to stocks by US sell-side strategists, fell 67 bps from 55.7% in April to 55.0% in May, which is a new two-year low.

“The SSI is now closer to a ‘Buy’ signal than a ‘Sell’ signal (3.5ppt vs. 4.2ppt) for the first time since September 2020, after which the gained 30% over the next 12 months. Historically, when the indicator has been this close or closer to a ‘Buy’ signal, NTM S&P 500 returns have been positive 96% of the time (vs. 83% over the full history). In the year to date, Wall St. consensus has shaved 4.1ppt from stock allocations, adding 2.9ppt to bonds and 1.4ppt to cash allocations, suggesting rising competition to stocks as rates rise,” Subramanian said in a client note.

The SSI dip in May also marks the fifth consecutive month of decline, which “corroborates the soured sentiment that we have recently noticed while marketing – clients have been asking us for reasons to be bullish.”

Subramanian sees enough evidence to be bullish in the near term, especially bearing in mind oversold levels. However, she also warned that continued volatility is likely.

“We recommend sticking with High Quality and a mix of defensive and inflation/rates beneficiaries. History shows that bear market rallies are common: 26 bear markets have occurred since 1929 (defined as a 20%+ fall without a 20% rally), and 65% of these bear markets had rallies of more than 10%, occurring 1.5 times on average per bear market,” the strategist told clients.