- Summer’s bear-market rally resulted in the first improvement in sentiment on Wall Street in 10 months, BofA said Thursday.
- BofA reiterated its view that the S&P 500 will end 2022 at 3600, a 9% drop from the end of August.
- “We still see no real signs of a bull market,” said BofA’s Savita Subramanian.
Sentiment on Wall Street brightened after the recent bear-market rally but Bank of America said the S&P 500 doesn’t look ready yet for a bull run and the index is likely to keep heading lower for the year.
Wall Street sentiment improved for the first time in 10 months after the S&P 500 surged 17% from its mid-June low, the investment bank said in a note published Thursday.
It said its Sell Side Indicator – which tracks sell-side analyst sentiment across Wall Street – rose 89 basis points to 54.1% in August, the first improvement in sentiment since October 2021. It said its reliable contrarian indicator has moved into neutral territory but remains closer to a buy signal than a sell signal for the fourth consecutive month.
“Improved sentiment, especially following a 17% rally off the June lows, suggests the bulls haven’t fully capitulated yet. But optimism around a soft landing and [first half of 2023] rate cuts has diminished following Jackson Hole, and there are still no real signs of a new bull market,” Savita Subramanian, head of US equity and quantitative strategy for Bank of America, said in the note.
The investment bank reiterated its call for the S&P 500 to end the year at 3,600, which represents a 9% decline from Wednesday’s close of 3,955.
Federal Reserve Chairman Jerome Powell at his speech in Jackson Hole, Wyoming, last week said the central bank is determined to drag down hot inflation levels. The Fed is working to slow down economic activity to bring down inflation that’s lingering around 40-year highs.
The S&P 500 had surged off largely on the back of bets of a “Fed pivot,” or the view that the Federal Reserve will begin cutting interest rates next year in the face of economic recession. The S&P 500 in mid-August starting drifting lower and, on Wednesday, ended the month of August with a 4.2% loss.
In referencing a bull market, the investment bank pointed to a previous note in which its outlined technical indicators signaling that stocks have more room to fall.
“We also note that the market has yet to see the full impact of Quantitative Tightening,” said Subramanian, referring to the Fed’s work in reducing its massive balance sheet. “Based on the historical relationship between Quantitative Easing and the market, planned QT implies a 7% market decline,” she wrote.
The Federal Reserve in September is scheduled to ramp up its balance-sheet reduction to a maximum of $95 billion per month as it draws back the stimulus it put in place in 2020 COVID-19 was spreading worldwide. The Fed’s balance sheet more than doubled to $8.9 trillion. It began winding down holdings of Treasury securities and mortgage-backed securities in May.
BofA said usually when its Sell Side indicator has been at current levels or lower, subsequent 12-month returns have been positive 94% of the time compared with 82% over the entire time period. The median 12-month return was 20%.