Can US stocks be bought at the dip after their decline? Bank of America: Sentiment indicators are far from a "buy" signal.

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Wall Street's optimistic sentiment towards US stocks loosened in March, but has not yet reached a level that would trigger a contrarian buy signal.

According to Wind Chasing Trading Desk, Bank of America equity and quantitative strategists Victoria Roloff and Savita Subramanian pointed out in a report released on April 1 that the Sell Side Indicator (SSI) shows, as geopolitical tensions caused the S&P 500 to drop 5% in a single month, the average recommended equity allocation from Wall Street strategists eased slightly from 56.0% to 55.7%. Although sentiment has cooled marginally, the indicator is still closer to a "sell" signal rather than a "buy" signal and is still quite far from triggering a contrarian buy zone.

This is the first time in over six months that the strategists’ average equity allocation recommendation has been cut, but the drop was only 30 basis points, about one-fifth of the decline seen following last April’s tariff announcement, indicating a fairly moderate adjustment. The current SSI reading is just 1.9 percentage points away from the "sell" signal threshold, while it is 4.4 percentage points away from the "buy" signal threshold, and still noticeably below levels seen at historical market tops, which typically exceeded 59%.

On the fundamental side, Bank of America maintains its year-end S&P 500 price target of 7100 points, representing about 9% upside from current levels and higher than the more restrained expectation earlier this year. Meanwhile, Bank of America's economists lowered their forecast for US real GDP growth in 2026 from 2.8% to 2.3%, but believe S&P 500 earnings per share can still achieve robust double-digit growth, provided the economic outlook does not materially deteriorate.

Sentiment is cooling but not "capitulating," indicator remains in the sell zone

SSI is Bank of America’s contrarian sentiment indicator, tracking the average recommended equity allocation for balanced funds from Wall Street sell-side strategists. The indicator's buy and sell signal thresholds are defined as plus or minus one standard deviation from the rolling 15-year average. The current "sell" threshold is 57.6%, the "buy" threshold is 51.3%, and the latest March reading is 55.7%, in a neutral to high region between the two.

Bank of America notes that March's pullback was the first cut in six months, triggered by rising geopolitical risks that led the S&P 500 to its worst monthly performance in almost a year. However, this adjustment is far less than the major shocks the market previously experienced—after last April’s tariff announcement, the indicator dropped about five times as much. This suggests that, despite noticeable volatility, Wall Street strategists' overall sentiment has not fundamentally shifted.

Historically, when SSI is in the "buy" zone, the S&P 500's average return for the next 12 months can be as high as 20.5%, with a median of 19.7%; when in the "sell" zone, the average return is only 2.7%, and there is a 38.9% chance of negative returns. The current indicator reading implies an approximately 12.5% price return for the S&P 500 over the next 12 months.

Rising oil prices drag GDP forecasts, but have limited impact on S&P 500 earnings

Despite the cooling in market sentiment, Bank of America believes the fundamental picture remains solid. The S&P 500's 2026 earnings expectations were raised by 2% in March, lifting the consensus expected year-over-year growth rate to 17%. Meanwhile, the forward P/E ratio for the S&P 500 has declined by about 15% from the recent highs at the end of October last year, easing valuation pressure.

Bank of America maintains its forecast of $310 in S&P 500 earnings per share, representing a year-over-year growth rate of about 13%. The report points out that from the current level to the year-end target of 7100 points implies about 9% price return.

Bank of America’s economists lowered their forecast for US real GDP growth in 2026 from 2.8% to 2.3%, mainly due to economic drag from rising oil prices. However, Bank of America believes this macro headwind has a relatively limited impact on overall S&P 500 earnings.

The report explains that energy costs account for a relatively small share of operating costs among S&P 500 components, and rising oil prices primarily create pressure for specific sectors, rather than posing a systemic threat to index-wide earnings. In the baseline scenario where the economic outlook does not see further substantial downgrades, Bank of America expects S&P 500 EPS to still achieve solid double-digit growth, and maintains its full-year forecast of $310.

Wall Street has long been underweight equities

SSI has historically been a reliable contrarian sentiment indicator. Notably, Wall Street strategists consistently recommended underweight equities throughout the bull markets of the 1980s and 1990s as well as from 2009 to 2020. The 2008 global financial crisis pushed the indicator’s recommended equity allocation below the traditional 60-65% balanced fund benchmark, and it hit a historical low of 43.9% in 2012. The current 55.7% reading has recovered substantially from the historical lows, but still lags behind the traditional benchmark zone, reflecting a structural shift in Wall Street’s overall asset allocation style post-crisis.

This shows that sell-side strategists, as a group, have long maintained a systemically underweight position in equities—which is the fundamental reason this indicator works from a contrarian perspective. When they get extremely bullish, it often means upside has been fully priced in. Currently, at 55.7%, the reading is above the post-crisis average but still quite far from historically extreme bullish levels.

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