Bank of America is urging a measured approach to the current equity rally, advising investors to favor selective stock choices rather than broad purchases of the S&P 500 after the benchmark regained record territory.
Central to the bank's guidance is its Sell Side Indicator (SSI) - a contrarian measure that tracks the average equity allocation recommended by Wall Street strategists for a balanced fund. The SSI held steady at 55.6% in April, unchanged from March, even as equities advanced to all-time highs.
That 55.6% reading sits 30 basis points below the level where the indicator began the year, while it remains 1.1 percentage points above the figure from a year ago when the SSI fell to 54.5% following Liberation Day. BofA strategists characterize the current reading as neutral, noting it is closer to tripping a sell signal than a buy signal - specifically, 1.9 percentage points from a sell trigger versus 4.4 percentage points from a buy trigger.
"Current level of 55.6% is well below levels reached in prior market peaks (typically over 59%) and implies a S&P 500 price return of 13% over the next 12 months - one of five inputs (and the most bullish input) into our S&P 500 target," the strategists said.
April delivered a strong month for the S&P 500, which posted a gain in excess of 10% - a result the bank describes as in the 98th percentile of monthly returns since 1928. That jump was attributed in part to hopes for a ceasefire and to corporate results that outperformed expectations.
However, BofA's analysis emphasizes that the advance was not broad-based. Mega-capitalization stocks led the move higher, while the equal-weighted version of the index lagged the cap-weighted benchmark by 5 percentage points. Only 23% of stocks outpaced the S&P 500 in April - a level the bank identifies as the fourth-lowest monthly reading in its dataset, which stretches back to 1986.
Despite the favorable earnings backdrop, the strategists point to emerging headwinds that could pressure valuations. They flagged "worsening equity supply/demand dynamics" and the "lagged impacts from the still-unresolved Iran conflict" as factors likely to create downward pressure. On that basis, the team recommends selectivity rather than indiscriminately buying the index at fresh highs.
Investor positioning on the buy side mirrored the SSI's neutral tone. Fund manager allocations have declined over the year but, according to BofA, do not show signs of panic.
Key takeaways
- SSI remained at 55.6% in April, unchanged from March, indicating a neutral contrarian signal on strategist recommended equity allocations.
- The S&P 500 rose more than 10% in April, a rare monthly return historically, but the advance was concentrated among mega-cap stocks rather than broad participation.
- BofA warns that supply/demand imbalances and lagged geopolitical effects could weigh on valuations, supporting a selective investment approach.
Sectors likely impacted
- Equities broadly, with particular relevance to large-cap technology and other mega-cap sectors that led the rally.
- Financials and asset managers, as fund manager allocations and positioning are referenced in the SSI and buyside activity.
Risks and uncertainties
- Worsening equity supply/demand dynamics - this could affect market liquidity and valuation across equity sectors.
- Lagged impacts from the unresolved Iran conflict - geopolitical developments are cited as a potential drag on valuations.
- Concentration risk in the rally - the limited number of stocks driving returns raises the risk that broader indices may be vulnerable if mega-cap leadership fades.
Note: The analysis and figures above are derived from Bank of America's internal measures and commentary as described by the bank's strategists.