Bank of America Merrill Lynch: Key indicators show that U.S. stocks are far from reaching extreme "bubble" levels
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As the S&P 500 records its longest six-month winning streak since 2021, discussions about "irrational exuberance" in the market have resurfaced.
However, according to ZF Trading Desk, Bank of America Merrill Lynch’s latest report released on November 2 points out that a key Wall Street sentiment indicator—the Sell Side Indicator (SSI)—is still far from reaching the extreme “bubble” level that would trigger a “sell” signal.
The "Sell Side Indicator" is a contrarian sentiment indicator—when Wall Street strategists as a whole are extremely pessimistic, it often signals a market rally, and vice versa. Data shows the indicator edged up from 55.5% to 55.7% in October.
The report notes that the current 55.7% reading remains in the “neutral” zone. Although it is far from the threshold that triggers a “buy” signal (51.3%), it is still 2.1 percentage points away from the threshold that would trigger a “sell” signal (57.8%).
More importantly, Bank of America emphasized that historically, readings of this indicator have typically exceeded 59% when the market peaks. This means that, although there are fewer and fewer bears, market sentiment has not yet reached an irrational frenzy.
The "Sell Side Indicator" Suggests 13% Upside in the Next Year
The "Sell Side Indicator" is not only a sentiment thermometer, but also a tool with predictive capabilities. Bank of America’s analysis shows that this indicator is significantly better at forecasting 12-month S&P 500 returns (R² value of 25%) than other single-factor models such as price-earnings ratios or dividend yields.
Based on its historical data model, the report clearly states that the current SSI level of 55.7% suggests a healthy price return of 13% for the S&P 500 over the next 12 months. However, this forecast is only one of five factors Bank of America uses to set its S&P 500 target price.
Looking back at historical performance, the contrarian predictive power of this indicator is clear:
- When the indicator is in the "buy" zone, the average total return of the S&P 500 over the following 12 months is 20.5%.
- When the indicator is in the "sell" zone, the average total return drops sharply to 2.7% over the following 12 months.
The current “neutral” reading suggests the market is neither extremely undervalued nor extremely overvalued.
Strong Fundamentals, but Market Already Priced In
The report also analyzes market fundamentals. Among companies that have reported earnings, 63% exceeded expectations on both EPS and revenue, the highest proportion since 2021, showing the strong fundamentals of businesses.
However, the market’s reaction tells a different story. According to the report, companies that beat expectations on both fronts saw their share price outperform the market by only 0.9 percentage points on the following day, below the historical average of 1.4 percentage points. Meanwhile, companies that missed expectations were severely punished, with shares underperforming the market by an average of 7.2 percentage points, nearly three times the usual drop.
This phenomenon strongly suggests that a lot of “good news” had already been digested and priced in by the market before the earnings season began. Investor expectations for the future are very high, making any disappointing news likely to trigger sharp sell-offs.
The report finally warns that, although liquidity remains ample, investors should be wary of any reversals in liquidity channels—especially if a Fed rate cut cycle occurs alongside credit tightening. This combination is typically the worst phase for the stock market.
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