‘Dangerous optimism’ has the stock market on the brink of euphoria, Bank of America warns

Summary List Placement The stock market is on the verge of "dangerous optimism" according to a Monday note from Bank of America. BofA's sell side indicator is close to generating a contrarian "sell" signal for stocks, the note said. "Wall street is <2ppt shy of euphoria," BofA said.  Sign up here for our daily newsletter,...

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Summary List Placement

Wall Street strategists are exhibiting “dangerous optimism” that has not been seen since August of 2007, according to Bank of America’s sell side indicator. 

The contrarian indicator gauges how bullish strategists are on stocks, and will generate a sell signal when the indicator surges past 60.3%. The most recent reading put the indicator at 58.4%, meaning it’s less than 2% away from signaling euphoria in the stock market, according to a Monday note from BofA.

The indicator has been stuck in the Neutral zone since December 2016.

Investors might have to “kiss double-digit S&P 500 returns goodbye” if the extreme optimism continues, based on historical data tied to the indicator. 

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“For the first time since 2011, the indicator’s output for expected total returns over the next 12-months has dropped to single-digits,” BofA said.

But stocks still look attractive relative to bonds given the current near-zero interest rate environment, BofA highlighted. The low interest rates also likely explain the strong bullishness on Wall Street.

And even though the indicator is forecasting low returns over the next 12-months, BofA said total returns over the next year have been positive 92% of the time when the sell-side indicator was near current levels. 

BofA reiterated its neutral stance on the S&P 500 with a year-end price target of 3,800, representing potential downside of 1% from Tuesday afternoon levels. The bank is sticking to its price target based off of the elevated bullish sentiment and “lofty valuations,” according to the note. 

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