September has the unenviable reputation of being a dismal month for the stock market and few analysts have been as vocal about an imminent correction as Bank of America Merrill Lynch strategist Savita Subramanian.
But on Thursday, Subramanian struck a decidedly bullish tone, suggesting that once the stock market navigates past its rough patch, the S&P 500 index
has the potential to gain over 22% over the next 12 months.
Bank of America’s Sell Side Indicator—a gauge to measure sentiment on Wall Street—fell to 49.6 in August, its lowest in more than three years. As a contrarian indicator, that is a green light for bulls.
“With the S&P 500’s indicated dividend yield currently above 2%, that implies a 12-month price return of 20% and a 12-month value of 2,604,” said the strategist in a report. “Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 100% of the time.”
To be clear, Bank of America’s own target for the large cap index in the next 12 months is comparatively more restrained at gains of roughly 10%.
“The sell side indicator is one of five inputs into our market outlook—it is a sentiment indicator, but we also incorporate fundamentals, technicals, valuation and earnings trends. Other indicators are less bullish and temper our outlook significantly,” Subramanian told MarketWatch.
The sell side is represented by people in the industry who sell financial products such as stocks and bonds while institutional investors including pension funds and insurance firms make up the buy side.
“The time horizon matters. One of the best short term indicators is positioning of the buyside, and here we have noticed that investors are now as aggressively positioned as they were ahead of the last two major pullbacks of last August and this January,” said Subramanian.
As such, the risks are still skewed to the downside, particularly with the U.S. presidential election likely to contribute to uncertainties, she said.
Read: The stock market has already picked the next U.S. president
Meanwhile, Tom Lee, managing partner at Fundstrat Global Advisors, forecast more upside potential by the year-end due to improving U.S. and global economic momentum and easing credit conditions.
“I think the markets [will] stage strong gains,” Lee said.
But before that, investors will have to deal with a downbeat September as well as a possible Federal Reserve rate hike and the U.S. political rodeo.