Bank of America analysts have noted an increase in equity sentiment, citing the Sell Side Indicator (SSI) as a key metric.
The bank's SSI, which tracks sell-side strategists' average recommended allocation to equities in a balanced fund, rose by 30 basis points to 55.6% in July, marking its highest level since early 2022.
However, this remains below the 2021 average of 59%, indicating that sentiment has not yet reached overly optimistic levels.
"The SSI is currently at its highest level since early 2022 but still well below its average level in 2021," the analysts explained, adding that this suggests we haven't reached dangerous levels of optimism yet.
Analysts note that historically, the S&P 500 has been up 94% of the time over the next 12 months when the SSI is at this level or lower, compared to 82% overall.
Despite the increase, the SSI remains in "Neutral" territory, which is less predictive than the extreme "Buy" or "Sell" thresholds, according to BofA.
The indicator is now 2.4 percentage points away from a contrarian "Sell" signal and 4.3 points from a "Buy." "The SSI's current level still indicates a healthy price return of 12% for the S&P 500 over the next 12 months," BofA noted.
While broad index gains may be limited in the near term, BofA sees significant opportunities within the S&P 500. "Equity sentiment has improved over the past year, but a lot of that optimism has been focused on Tech and AI rather than the broader market," analysts observed.
High dividend yielders, cyclicals, and "old school" capex beneficiaries are seen as offering more compelling return potential than crowded Tech stocks, which could face de-risking if AI monetization slows.