Investors with bullish views on stocks may be more selective than usual: BofA By Investing.com

Investing.com — Analysts at Bank of America said in a note on Tuesday that despite high stock market sentiment, investors are showing selective optimism, favoring secular growth sectors while being cautious about others.

According to BofA’s Sell Side Indicator (SSI), which tracks the average allocation recommended by sell-side strategists to stocks, sentiment was 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,” at just 1.8 percentage points from a sell indicator and at 4, 9 percentage points of a buy signal.

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

BofA pointed out that the SSI has been a reliable contrarian indicator in the past, often signaling bullish when Wall Street is excessively bearish and vice versa. The indicator’s current level indicates a potential price return of 11.5% over the next 12 months, a solid figure but lower than recent history.

Despite the bullish outlook, BofA analysts believe investors can be more selective in their stock picks.

“The positioning of institutional and individual investors remains tough on technology and growth,” they wrote.

However, BofA’s view suggests that cyclicals could outperform defensively going forward, driven by accelerating corporate earnings. As a result, BofA increased its allocation to Materials, seeing opportunities for cyclical leadership in the coming months.

“We generally prefer cyclicals over defensives and raised materials to overweight in tandem with this report,” the bank concluded.