Is the pullback in US stocks not over yet? Bank of America’s contrarian indicator is close to issuing a "sell" signal

According to the Zhitong Finance APP, as U.S. stocks have recently performed poorly, a contrarian indicator from Bank of America is nearing a "sell" signal. In a research report released on March 3, Bank of America stated that its "Sell-Side Indicator (SSI)" fell to 56.7% in February, marking the first decline of this indicator since 2024. Although the indicator remains in the "neutral" range, it is closer to a "sell" signal—1.3 percentage points away from the "sell" signal and 5.4 percentage points away from the "buy" signal.

Data shows that the SSI is a contrarian indicator that tracks Wall Street sell-side strategists' recommendations for the average allocation of stocks in balanced funds. When Wall Street is extremely bullish, it suggests that the stock market may be bearish in the future; conversely, the opposite is true. Notably, the last time the SSI was this close to issuing a "sell" signal was in February 2021, after which U.S. stocks peaked 10 months later.

Bank of America indicated that the current level of the SSI suggests that the over 20% returns seen in the S&P 500 index over the past two years are likely a thing of the past, but it still points to a relatively healthy 11% return over the next 12 months.

Bank of America stated that the SSI is a reliable contrarian indicator. Although it does not capture every rise or fall in the stock market, historically, this indicator has better predictive ability for the total returns of the S&P 500 index over the subsequent 12 months compared to many other market timing tools.

Additionally, Bank of America noted that the latest reading of the SSI has increased the inconsistency among sentiment models, with extreme values across various metrics: the AAII bull-bear spread has just dropped to its lowest level since September 2022, which is inconsistent with Bank of America's fund manager survey and other sentiment readings from GWIM. Furthermore, the bank's recent bearish signals have become more negative but have not yet reached levels indicating a market peak.

Stagflation concerns return to Wall Street! U.S. stock market outlook is worrying

Due to ongoing policy uncertainty and disappointing economic data putting pressure on the market, the S&P 500 index fell 3% from its historical high at the end of February after reaching a record high in mid-February. After a 1.76% drop on Monday, the S&P 500 index has declined 0.54% year-to-date.

According to statistics from Ryan Detrick, Chief Market Strategist at Carson Group, the S&P 500 index not only experienced its largest single-day drop of the year on Monday but also recorded the second worst first trading day performance in March's history. He noted that only the first trading day performance in March 2009 was worse than Monday's decline.

The frequent use of tariffs by U.S. President Trump and the persistently weak performance of U.S. economic data have raised concerns on Wall Street that the U.S. economy may fall into a stagflation trap, which would ultimately impact corporate profits Apollo Global Management's Chief Economist Torsten Slok stated that he believes the elements of stagflation may have emerged. BCA Research's Chief Strategist Davorin Joshi believes that the U.S. could fall into "mini-stagflation" as early as the second quarter of this year.

Some Wall Street professionals have begun to issue warnings about the outlook for U.S. stocks. For example, Goldman Sachs strategist David Kostin pointed out in a report that the S&P 500 index briefly erased gains since 2025 last week, and investor risk exposure has decreased, but the current level of exposure is still not low enough to indicate that the stock market has "tactical upside potential due to low positions." David Kostin stated, "To completely reverse the recent weakness in U.S. stocks, the outlook for U.S. economic growth must improve." At the same time, he lowered the annual earnings growth forecast from 11% to 9%.

Scott Rubner, Managing Director and Strategist at Goldman Sachs Global Markets, recently also expressed a lack of confidence in whether market demand is high enough to support a rebound in U.S. stocks. Last month, as the inflow of funds from retail and other buyers decreased, Scott Rubner turned bearish on U.S. stocks and pointed out that the market is in the final stage of clearing positions.

However, amid widespread concerns about the outlook for U.S. stocks, UBS has turned tactically bullish and expects the S&P 500 index to rise by 4% next month. Michael Romano, Head of Macro Equity Derivatives Sales at UBS Securities, stated in a report, "Stock risk signals showed significant changes last week, reaching a volatility of 2 standard deviations. The S&P 500 index is expected to reach 6,100 points in the short term."

UBS's optimistic forecast is not unfounded. UBS's Rebecca Cheong pointed out that some key indicators in the market have shown positive changes. First, retail traders shifted from selling to buying in their operations last Friday, indicating a subtle change in market sentiment. Second, the selling pressure from systematic funds that track trends, such as Commodity Trading Advisors (CTAs), has eased, creating favorable conditions for a market rebound