Bank of America has a message for Wall Street: You've been too afraid for the entire bull market - and one signal suggests stocks could still surge 12% from current levels

CNBC

Savita Subramanian, head of US equity and quantitative strategy for Bank of America

• For much of the nearly 11-year-old bull market, investors have been worried that another downturn was about to begin.
• Savita Subramanian - Bank of America's head of US equity and quantitative strategy - says their cautiousness is a good sign for the market.
• She says strategists are telling clients to underweight stocks in their portfolios, and historically, that's a signal equities are likely to rise.
• While Subramanian is forecasting a gain of about 2% for the S&P 500 in 2020, she says this allocation measurement suggests the index could rise 12%.
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Plenty of investors are kicking themselves over stock market gains they missed in 2019, if not the past 11 years. But Bank of America Global Research says they're still doing it.

Savita Subramanian, the firm's head of US equity and quantitative strategy, is telling clients that Wall Street is acknowledging they're under-invested in stocks. That might be a problem for them, but Subramanian calls it a good sign for the market overall, and a hint that stocks should grind higher in the months ahead.

"Bull markets rarely end with such a lack of enthusiasm for stocks, and Wall Street has recommended a net underweight in equities throughout this entire bull market," she wrote in a note to clients.

Subramanian and her team surveyed and gathered data from eight strategists, and she says the group is collectively recommending a 55% allocation to stocks - substantially lower than the traditional 60-40 stock and bond allocation.

Using the chart below, which compares the allocations strategists recommend to the traditional 60% to 65% portfolio weighting, she shows that Wall Street has recommended an underweight position on stocks throughout the 11-year bull market. Even as the economy thrived and kept expanding, they've rarely come close to that 60% mark.

Bank of America US equity and quantitative strategy

Despite a growing economy and long bull market, Savita Subramanian at Bank of America says Wall Street strategists are still telling investors to underweight stocks.

That's good news for stocks for a few reasons. One, simply, is that the market can't be an overhyped bubble if strategists aren't even that enthusiastic about them.

The other is that she's found that survey data is a contrarian indicator. That is, the market usually rises when the strategists underweight stocks, and when they shift their portfolios to overweight them at 61% or higher, the market is usually lower 12 months later.

"Wall Street strategists' average recommended allocation to stocks in a balanced fund, has been a very reliable contrarian indicator, and currently suggests 12% price returns over the next 12 months," she says. "Historically, when the Sell Side Indicator has been this low or lower, total returns over the subsequent 12 months have been positive 94% of the time, with median 12-month returns of +20%."

She's currently more conservative than that, as Subramanian's year-end price target for the S&P 500 index is 3,300 - only about 2% above the S&P's current levels. But she says those low allocations, and the implication that there is money on the sidelines, suggests the market has upside beyond her target.

Subramanian adds that as a way of timing the stock market, this method has a better track record than popular simple indicators like the yield curve or the dividend yield of the S&P 500.

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