BofA sees improving equity sentiment, but no signs of overheating

Bank of America's Sell Side Indicator (SSI) rose to 55.6% in June, marking its second consecutive monthly gain, yet remains subdued and in 'Neutral' territory, signaling continued investor caution despite the S&P 500's record highs. While the contrarian indicator suggests a potential 13% S&P 500 return over the next 12 months, BofA highlights significant near-term risks from U.S. macro developments, such as upcoming payrolls and potential trade tariff re-escalation, which could negatively impact S&P 500 EPS growth. This cautious sentiment is further underscored by the SSI's current level remaining below the traditional 60-65% allocation range for balanced funds.

Analysis

Bank of America's Sell Side Indicator (SSI) edged higher to 55.6% in June, its second consecutive monthly increase, yet overall sentiment remains subdued despite the S&P 500 reaching an all-time high. The indicator's current "Neutral" reading is 1.4 percentage points below its recent peak of 57.0% and is closer to the "Sell" threshold than "Buy," signaling persistent caution among Wall Street strategists. As a contrarian signal, this cautious positioning implies a potential 13% price return for the S&P 500 over the next 12 months. However, BofA tempers this outlook by highlighting significant near-term risks, including volatility tied to the upcoming U.S. payrolls report and a July 9 tariff deadline. A re-escalation of trade tensions, specifically, is cited as a key downside risk to the market's consensus expectation for high single-digit S&P 500 EPS growth this year, a crucial support for current valuations.

Key Decisions for Investors

• Consider the contrarian bullish signal from the SSI, which implies a potential 13% upside in the S&P 500, but weigh this against the prevailing cautious sentiment among strategists.
• Prepare for heightened near-term volatility by closely monitoring key macro catalysts, particularly the upcoming U.S. payrolls report and any developments related to the July 9 tariff deadline.
• Evaluate portfolio exposure in the context of potential downside risks to corporate earnings, as a re-escalation of trade tensions could threaten the high single-digit EPS growth currently priced into the market.