The Contrarian Stock Market Indicator is About to Flash Red. What That Means for Investors?

The stock market has been in flux as investors react to a steady stream of headlines. On Tuesday, stocks are attempting to move into positive territory, even as China escalates trade tensions with new tariff measures.

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Meanwhile, earnings season remains in full swing, with results from a major competitor to Nvidia set to be released after the closing bell.

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Amid all the noise influencing market sentiment, Bank of America is pointing to a contrarian indicator that is approaching a “sell signal.”

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BofA’s sell-side indicator, which tracks the average equity allocation recommendations from Wall Street strategists, climbed to 57% in January—the highest level since early 2022. According to BofA equity and quant strategist Savita Subramanian and her colleague Victoria Roloff, that reading is just one percentage point shy of signaling a sell recommendation.

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Essentially, when a large number of strategists are urging investors to buy stocks, it may be wise to take a more cautious approach. Historically, when the indicator has reached 57% or higher, the market has delivered positive returns over the following 12 months only 65% of the time, compared to an 82% success rate in general, BofA noted.

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“The sell-side indicator has consistently served as a reliable contrarian signal,” Subramanian and Roloff explained. “It has been bullish when Wall Street was overwhelmingly bearish and vice versa.” The last time it approached these levels was in December 2021.

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In January, the strategists maintained their equity allocations following a 2.8% rise in the S&P 500 in December. This suggests they are taking a wait-and-see approach

regarding trade uncertainties and potential policy risks.

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At its current level, the indicator suggests an estimated market return of 10.5% over the next 12 months—lower than the past two years but still solid. “This supports our outlook that 2025 will be a year for stock picking rather than index investing,” the BofA team said.

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Societe Generale echoed a similar sentiment, predicting that 2025 could be the best stock-picking environment in 25 years. They cited anticipated reflationary policies, including lower taxes, reduced regulation, and declining oil prices, as factors that could create strong investment opportunities.

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U.S. stocks are attempting to move higher in early trading, though the Dow Jones Industrial Average is trailing behind.

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Treasury yields are climbing, with the 10-year yield at 4.55% and the 2-year yield at 4.24%. The ICE U.S. Dollar Index has dropped by 0.5%, while oil prices have tumbled more than 3%.

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