Bank of America Foresees a 16% Upswing in the S&P 500
In a recent assessment, Bank of America suggests that the S&P 500 may experience a remarkable 16% surge over the next year, as a potent “buy” signal, with a history of strong accuracy, approaches activation. This signal, known as the Sell Side Indicator (SSI), is currently teetering in “neutral” territory, but it is three times closer to a “buy” reading than a “sell” reading, potentially indicating a more bullish trajectory for the stock market.
The SSI: A Reliable Contrarian Indicator
Bank of America’s SSI has earned a reputation as a dependable contrarian indicator. It tends to signal a bullish outlook when Wall Street investors turn overly bearish about the market. According to a team of strategists led by Bank of America’s Savita Subramanian, historical data demonstrates that when the SSI has been at its current level or lower, the S&P 500 has delivered positive returns over the following 12 months 95% of the time, with a median return of 21%.
Bearish Sentiment Amidst Rising Bond Yields
Bearish sentiment in the stock market has been fueled by the recent surge in bond yields. Last month, the yield on the 10-year Treasury note reached a 16-year high, leading to concerns that equities were becoming less attractive and raising apprehensions about an impending recession. Consequently, this caused a sell-off in stocks, resulting in the S&P 500 recording its third consecutive monthly loss.
Impact of Rising Bond Yields
It is important to note that the impact of rising bond yields might not be as significant for many businesses and consumers. More than 75% of debt held by S&P 500 companies and 85% of US mortgages are financed at fixed long-term rates, as highlighted by strategists. This suggests that while higher rates have had a negative impact on equity sentiment, businesses and consumers have the time to adjust and may weather the situation better than initially expected.
Economic Resilience
In a separate note, Bank of America argued that the economy is demonstrating resilience due to this lagged effect, and stocks can still perform well in an environment with elevated interest rates. The recent decision by the Federal Reserve to maintain interest rates had a calming effect on bond yields, with the yield on the 10-year Treasury decreasing by approximately nine basis points to 4.776%.
In summary, Bank of America’s analysis suggests that the S&P 500 could be on the cusp of a significant upward move, with the SSI pointing to a potential 15.5% gain over the next year. This analysis is underpinned by the belief that the impact of rising bond yields may not be as detrimental as it initially appears, and the economy could continue to perform well in this environment.
