Investing.com – Bank of America analysts said in a note on Tuesday that despite heightened sentiment in the stock market, investors are selectively bullish, favoring secular growth sectors while being cautious on others .
According to BofA’s Sell Side Indicator (SSI), which tracks the average recommended equity allocation of sell-side strategists, sentiment was unchanged in September at 56.2%, the highest level in 2.5 years.
While the SSI is still in ‘neutral’ territory, BofA pointed out that it is much closer to a contrarian ‘sell’ signal than a ‘buy’, and is only 1.8 percentage points away from a sell indicator and 4. 9 percentage points away from a buy signal.
They explained that this suggests that while sentiment has improved, investors are still wary of market risks, especially those related to the health of the labor market.
BofA emphasized that the SSI has historically been a reliable contrarian indicator, often providing a bullish signal when Wall Street is too bearish, and vice versa. The current level of the indicator points to a potential price return of 11.5% over the next twelve months, a solid figure but lower than in recent history.
Despite the optimistic outlook, BofA analysts believe investors may be more selective in their stock picks.
“The positioning of institutional and individual investors remains a focus for technology and growth,” they wrote.
However, BofA’s view suggests that cyclical stocks may outperform defensive stocks in the future, driven by the acceleration of corporate earnings. As a result, BofA has increased its allocation to Materials and sees opportunities for cyclical leadership in the coming months.
“Overall, we prefer cyclical stocks to defensive stocks and have increased our overweight in the materials sector along with this report,” the bank concluded.
