Investors with positive equity views may be more selective than usual: BofA

Investing.com -- Bank of America analysts said in a note Tuesday that despite elevated sentiment in the equity market, investors are demonstrating selective bullishness, favoring sectors with secular growth while being cautious on others.

According to BofA's Sell Side Indicator (SSI), which tracks sell-side strategists' average recommended allocation to equities, sentiment remained unchanged in September at 56.2%, the highest level in 2.5 years.

While the SSI remains in "Neutral" territory, BofA pointed out that it is much closer to a contrarian "Sell" signal than a "Buy," sitting just 1.8 percentage points from a sell indicator and 4.9 percentage points away from a buy signal.

They explained that it suggests that although sentiment has improved, investors are still wary of market risks, particularly those linked to the health of the labor market.

BofA highlighted that the SSI has been a reliable contrarian indicator in the past, often signaling bullish when Wall Street is overly bearish and vice versa. The indicator's current level points to a potential price return of 11.5% for the S&P 500 over the next 12 months, a solid figure but lower than recent history.

Despite the optimistic outlook, BofA analysts believe that investors may be more selective in their stock picks.

"Positioning of institutional and individual investors remains Tech- and growth-heavy," they wrote.

However, BofA's view suggests that cyclicals may outperform defensives going forward, driven by corporate profit acceleration. As a result, BofA has raised its allocation to Materials, seeing opportunities for cyclical leadership in the months ahead.

"Overall, we prefer cyclicals over defensives, and have raised Materials to overweight in tandem with this report," concluded the bank.

Source: Investing.com