History says that when investors are as bearish on stocks as they are now, big gains are ahead, according to BofA.
Bearish stock allocations are a strong contrarian indicator for future gains.
The S&P 500 saw gains over the next 12 months 94% of the time when investors were this pessimistic.
Investors are so bearish on stocks it could actually drive more upside for the market, with the S&P 500 potentially rising 16% over the next year, according to Bank of America.
"We see reasons for upside in equities than negative sentiment," sell side strategists said in a note on Thursday, pointing to investors' growing pessimism on equities over the last few months.
In May, Wall Street strategists lowered their exposure to stocks by 6.6%, while increasing their exposure to bonds by 6.4%.
But that could reflect major gains ahead, as bearishness is a contrarian indicator for future upside. Given investors' current level of bearishness, the S&P 500 could end the year at 4,600 and reach 4,900 in the next 12 months, according to the bank's Sell Side Indicator, which implies a 16% upside in the benchmark index over the coming year.
The S&P 500 saw gains over the next 12 months 94% of the time when investors were this bearish in the past, the note added, with a median return of 21%.
That indicator coincides with other bullish factors. For one, more firms are shifting their focus towards efficiency, such as by implementing artificial intelligence into their operations. That could potentially boost production as well as investor returns, strategists said.
Interest rates could also soon drop as the Federal Reserve gets a handle on inflation, strategists added, which will supplement stock gains.
The S&P 500 is up about 10% year-to-date, gaining despite a spate of bank failures, recession fears, and a US debt ceiling fight.
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