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Stocks crushed by the downturn are the closest they’ve been to ‘buy’ since 2017, according to one key indicator

January 3, 2023, 10:46 PM UTC
Stocks are close to a buy, according to Bank of America.
Michael Nagle—Bloomberg/Getty Images

As the stock-market rout shows no end in sight, an equity indicator constructed by Bank of America offers a glimmer of hope. 

The bank’s so-called sell-side indicator, which aggregates Wall Street strategists’ asset allocation views, fell 33 basis points in December and is now 1.5 percentage points away from the level that’s historically tied to a good buying opportunity. At the current level, the indicator is closest its been to signaling a ‘buy’ since 2017.

“One reason we are more constructive on equities in 2023 is the big drop in sentiment during 2022,” Bank of America’s strategists including Savita Subramanian wrote in note to clients. “It has been a bullish signal when Wall Street strategists were extremely bearish, and vice versa.”

If sentiment is prone for an eventual turnaround, it didn’t show on Tuesday. After declining 19% in 2022, the S&P 500 Index fell 0.4% on the first trading day of 2023 as investors continued to assess the outlook on growth stocks. Tesla Inc. dropped the most since 2020 after fourth-quarter deliveries missed estimates, despite the electric-carmaker offering incentives in important markets. And Apple Inc. shares also slipped pushing the iPhone maker’s market value below $2 trillion. 

Whether the rebound will happen this time is anyone’s guess, with a lot likely contingent on the Federal Reserve’s path of interest-rate hikes. To Bank of America’s strategists, negative sentiment should help the S&P 500 reach 4,000 by the end of the year, a level that implies a 4.6% jump from its close on Tuesday. 

Sentiment indicators have been questionable investment tools in 2022, with readings historically associated with rebounds preceding even bigger declines. But as the rout keeps progressing, valuations on the S&P 500 are becoming more reasonable, strengthening the case for investors with cash to jump in. The 500-member index is trading at 16.6 times its projected 12-month profits, in line with its average reading this century.

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