A BofA indicator that measures Wall Street stock bullishness is signaling weak 12-month returns

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A BofA indicator that measures Wall Street stock bullishness is signaling weak 12-month returns
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  • Bank of America said its contrarian indicator measuring Wall Street bullishness is close to triggering a sell signal.
  • The Sell Side Indicator is at 59.5%, which is near the contrarian sell signal of 60.1%.
  • The current level projects 12-month price returns of 6%, lagging the average forecast of 13% since the financial crisis ended in 2008.

Bank of America on Wednesday said its measure of equity-investor enthusiasm is signaling underperformance relative to history for the S&P 500 over the next year.

The investment bank said its Sell Side Indicator - which assesses sell-side analyst sentiment across Wall Street - was at 59.5% in August for a second straight month. It remains dangerously close to the 60.1% threshold, which would trigger a contrarian sell signal. That level has not been breached since 2007, according to BofA.

The figures come as investors assess a mix of factors that could cause gyrations in stocks, such as a drop in consumer sentiment, peak profit growth for corporate earnings, and potential benefits from a pending infrastructure bill in Washington.

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"The current level is forecasting 12-month price returns of just 6%, a much weaker outlook compared to an average 12-month forecast of 13% since the end of the Global Financial Crisis," said equity strategists led by Savita Subramanian in a note.

The indicator is at its closest sell threshold since May 2007, after which the S&P 500 declined 7% on a total return basis in the subsequent 12 months. BofA said usually when the indicator has been this close to a sell signal - or even closer - subsequent 12-month total returns have been positive 62% of the time compared with 83% positive returns over the entire time period.

BofA's caution arrived as the S&P 500 index finished August trading with a seventh consecutive month of gains and as numerous record highs have pushed the index up by 20%.

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September historically is the worst month in the year for stocks in terms of generating returns. But research firm Fundstrat this week said September market returns could be stronger than consensus after a strong performance in equities during the first half of the year.

Read more: A 48-year market vet warns that the Fed will be forced to tighten policy 'way sooner' than investors anticipate as inflation continues to soar - triggering a stock market crash of up to 80%

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