Wall Street sentiment index is close to release "buy" signal, S&P 500 may rise 16% next year.

According to the Zhongtong Finance APP, the US stock market has experienced a rare three-month consecutive decline. However, for investors, there is also a positive side to this: if history is any indication, the pessimistic sentiment is laying the foundation for future gains. A contrarian indicator from Bank of America is approaching a "buy" signal. In a report released on Wednesday by Bank of America strategists Savita Subramanian and others, the current level of this indicator suggests a 15.5% price return for the S&P 500 index over the next 12 months.

Bank of America's Sell Side Indicator (SSI) experienced its largest decline in a year in October and is currently approaching a level that indicates extreme bearishness in the market, which is positive for stocks.

Subramanian wrote, "The SSI has always been a reliable contrarian indicator - in other words, when Wall Street is extremely bearish, it is a bullish signal, and vice versa."

The S&P 500 index fell 2.2% in October, marking the first three-month decline since the beginning of 2020. The reasons for this decline include escalating tensions in the Middle East and a surge in US Treasury yields, which further worsened the already unstable market sentiment.

The decline in the US stock market and other risk assets seems to validate the bearish views of Wall Street, including Morgan Stanley's Mike Wilson and JPMorgan's Marko Kolanovic, who warned that despite the rebound in the stock market in the first half of this year, the lagging impact of rising interest rates still exists. The S&P 500 index has risen by about 10% year-to-date.

However, Subramanian believes that concerns about rising borrowing costs posing a potential threat to the US stock market may be exaggerated.

She said, "Although high interest rates have dampened market sentiment, we believe that the performance of US companies and consumers may be better than expected."

Bank of America's data shows that historically, when the Sell Side Indicator is at its current or lower level, there is a 95% probability of positive returns for the S&P 500 index over the next 12 months, with a median return of 21%.

The strategists stated that although the indicator is still in the "neutral" range, it is more inclined to issue a "buy" signal rather than a "sell" signal.