Is the US stock market in danger? This important indicator has reached a new high in two and a half years

According to Bank of America's Global Research Department, Wall Street sentiment has turned optimistic in the final weeks leading up to the presidential election on November 5, and this "contrarian signal" may indicate limited upside for the U.S. stock market.

Bank of America's Sell Side Indicator (SSI) tracks the average stock allocation recommended by Wall Street strategists. Data shows that this indicator rose to its highest level in two and a half years in October, reaching 56.7% (see the chart below), an increase of 50 basis points compared to September. In a client report released on Friday by the strategy team led by Savita Subramanian, head of U.S. Equity and Quantitative Strategy at Bank of America, it was noted that the sentiment index had briefly stalled in September but regained upward momentum in October.

However, this surge in sentiment is not necessarily a good sign for the stock market. The Bank of America team has long viewed the SSI as a "reliable contrarian indicator," as overly optimistic sentiment may prompt some investors to take the opposite stance—when most people in the market are optimistic, it is often a good time to sell.

The Subramanian team stated that despite the optimistic sentiment in October, the SSI remains in the "neutral" range, just 1.4 percentage points below a "sell" signal.

Bank of America strategists wrote in the report: "The current indicator level of 56.7% suggests an approximate 11% price return for the S&P 500 over the next 12 months, which, while below recent historical levels, is still roughly in line with the annualized return over the past decade."

However, investors may want to seize the opportunity to "remain selective," focusing on areas of the market that are "relatively out of favor," such as high dividend yield stocks, large-cap value stocks, and cyclical stocks.

It is worth noting that the rise in stock market sentiment coincides with a challenging month. Investors are preparing for a new round of economic data, third-quarter corporate earnings, Federal Reserve policy meetings, and the election. According to Dow Jones Market Data, the S&P 500 and Dow Jones Industrial Average experienced their worst month since April in October, while the tech-heavy Nasdaq Composite Index recorded its largest monthly decline since July.

Republican candidate Trump and Democratic candidate Harris will remain the focus of the stock market next week, as the two candidates are neck-and-neck in polls with only a few days left until the election.

Jeff Grills, head of U.S. Cross-Market and Emerging Market Debt at Aegon Asset Management, stated that it is uncertain how the fiercely contested presidential election results will affect market sentiment. "What usually leads to poor market performance is 'uncertainty,' especially after election night," Grills told the media on Friday. "The longer the uncertainty lasts, the more concerns investors have, which may lead to increased risk aversion in the market." He added, "Once the election results become clear, the market should refocus on fundamentals and gradually return to normal from the election process."

After the October employment report fell short of expectations, further increasing the likelihood of aggressive rate cuts by the Federal Reserve, the U.S. stock market surged on Friday, with technology giants led by Amazon (AMZN.US) also driving the overall market up.

Nevertheless, according to FactSet data, the major indices on Wall Street still closed lower this week, with the S&P 500 index down 1.4%, the Nasdaq index down 1.5%, and the Dow Jones Industrial Average down 0.2% this week