Is the US stock market rally not over? Bank of America indicator: S&P 500 index expected to rise 16% in the next year.

According to the Zhongtong Finance APP, the Bank of America's Sell Side Indicator, a measure of bullishness in the stock market, rose by 0.33 percentage points in June, approaching 53%. This is the largest monthly increase since November last year. According to the bank's analysis, this sentiment indicator has been hovering within 2 percentage points below the reverse "buy" level in the past year, and the current level indicates a 16% price return rate for the next 12 months. Bank of America's data shows that this will push the S&P 500 index to 4800 points by the end of the year and 5200 points in one year.

Despite the significant increase in the US stock market last month, Wall Street's expectations for the US stock market are still close to a 6-year low, indicating a brighter outlook for US stocks. This indicator tracks investors' sentiment towards the US stock market based on asset allocation recommendations provided by Bank of America and Bloomberg.

Although the Sell Side Indicator cannot reflect every rise or fall in the stock market, historically, it has had some predictive power for the total return of the S&P 500 index in the following 12 months. In the past, Wall Street's consensus stock allocation has been able to send signals that are contrary to strategist recommendations, meaning that it is a bearish indicator when analysts are bullish, and vice versa.

Meanwhile, the S&P 500 index rose by 6.5% in June, marking the best monthly increase since October last year. Although the S&P 500 index has risen by 16% in the first half of 2023, Bank of America stated that the index has hardly changed, being only 0.16 percentage points lower than the beginning of the year.

Due to the prevailing pessimistic sentiment among analysts, this pessimism provides a favorable backdrop for the US stock market. According to the bank's analysis, this sentiment indicator has been hovering within 2 percentage points below the reverse "buy" level in the past year, and the current level indicates a 16% price return rate for the next 12 months. Bank of America's data shows that this will push the S&P 500 index to 4800 points by the end of the year and 5200 points in one year.

Bank of America's stock and quantitative strategist, Savita Subramanian, wrote in a report to clients this week: "The consensus on stock allocation on Wall Street has always been a reliable contrarian indicator. In other words, when Wall Street strategists are extremely pessimistic, it is a bullish signal, and vice versa."

Bears point out that they are concerned that the Federal Reserve will disrupt this upward trend and that the rise in US stocks is driven solely by large technology companies. Currently, the stock market has far exceeded Wall Street's expectations for 2023. At the beginning of this year, strategists predicted that the S&P 500 index would remain flat, but now they expect it to close the year down by around 8% from Wednesday's closing price.

Skeptics like Morgan Stanley strategist Mike Wilson and J.P. Morgan strategist Marko Kolanovic believe that the recent stock market rally will be short-lived, partly due to signals of further tightening from the Federal Reserve. Meanwhile, Bank of America strategist Michael Hartnett believes that the momentum of this year's rebound is weakening.

However, strategists, including Subramanian, argue that concerns about large tech companies have been exaggerated. Subramanian states, "Amid mixed macro signals, strategists seem reluctant to adjust their allocations. Despite some investors becoming more bullish recently due to artificial intelligence, we believe there are broader reasons for the stock market to rise."