BofA Sees Cracks Forming in Wall Street’s Bullishness on Stocks

(Bloomberg) -- Wall Street's souring on the rally after three straight record highs for the S&P 500 Index.

Bank of America's proprietary sell-side indicator reached a six-month low in April after the biggest drop since December. The gauge of Wall Street sentiment toward U.S. equities is derived from asset-allocation recommendations provided to the bank and Bloomberg.

“Optimism this year had been sustained until now, amid benign Fed policy and green shoots in global data,'' Savita Subramanian, the bank's head of U.S. equity and quantitative strategy, said in the report. “The recent drop in this indicator may reflect cautiousness after stocks have rallied 25 percent from December lows.''

It's a natural place for strategists to question whether the rally has legs. The relentless march higher in the S&P 500 to kick off the year has the gauge trading right about where Wall Street expects it to end the year, according to the median of estimates compiled by Bloomberg.

This reported cooling in optimism has anecdotal support. Canaccord Genuity chief market strategist Tony Dwyer, for one, expects a “limited and temporary'' correction of less than 5 percent in U.S. stocks in light of the torrid advance and recent deterioration in market breadth. Such a pullback would be good news for the legions of investors who are waiting on the sidelines for a dip to buy, according to JPMorgan Chase strategist Marko Kolanovic.

Other surveys also affirm this relative ambivalence toward U.S. stocks. The share of individual American investors who have a “neutral” view on the stock market hasn't been this high since the middle of 2016.

Bank of America's sentiment measure was close to euphoric levels at the end of November, just before the bottom fell out of the market, and has tended to be more of a contrarian indicator. Thus, the drop-off is actually a positive for stock bulls, Subramanian added.

“Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 92 percent of the time, with median 12-month returns of +18 percent,'' she wrote.

To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Brendan Walsh, Randall Jensen

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