Time could be running out for U.S. equities.
Stocks have continued to hit new highs this year despite concerns over global growth, geopolitical events, and an earnings recession. That dissonance may be coming to an end as analysts at Bank of America Corp. predict we are approaching the market's last hurrah.
The crux of the argument is that the firm's contrarian sell side indicator, which measures Wall Street's bullishness on equities, jumped to a six-month high in November, its biggest gain in more than a year. Right now, the index is pointing toward a rally of almost 20 per cent for U.S. stocks over the next 12-months, but the analysts believe that a rally of that magnitude could mark the end of the bull run.
"[T]he post-election bounce in Wall Street sentiment could be the first step toward the market euphoria that we typically see at the end of bull markets and that has been glaringly absent so far in the cycle," a team led by Savita Subramanian, head of U.S. equity and quantitative strategy at the firm, wrote in a note Thursday.
"The Sell Side Indicator does not catch every rally or decline in the stock market, but the indicator has historically had some predictive capability with respect to subsequent 12-month S&P 500 total returns," the bank said.
Bank of America analysts currently have a base case call for the S&P 500 to end 2017 at 2,300, or 5 per cent above today's levels. With this indicator taken into consideration when formulating their outlook, the team's bull case scenario represents a rapid rise in stocks. "
The case for a traditional euphoria-driven end-of-bull-market rally is easy to argue for, and 20 percent or greater annual returns are the historic norm, putting the S&P 500 at 2,700 in our bull case," they conclude, adding that their bear case calls for stocks to end the year down 27 percent at 1,600.