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Wall Street confidence plummets as markets show 80% chance of recession

  • Wall Street is preparing for a recession, according to analysts at Bank of America.
  • BofA’s sell indicator hit its lowest point in more than five years, indicating a decline in investor sentiment.
  • Markets are pricing an 80% chance of a mild recession and a 30% chance of a severe slowdown.

Bank of America analysts say Wall Street is the most depressed about the stock market in years, and investors are bracing for a recession.

In a Wednesday note, analysts wrote that the bank’s sell indicator had fallen to its lowest level in more than five years. The measure, which tracks the average stock allocation recommended by sell-side strategists, slipped 78 basis points in July.

“We found that the consensus allocation in Wall Street stocks has always been a reliable contrarian indicator,” the BofA analysts wrote. “Although the SSI does not capture every rally or decline in the stock market, the indicator has historically had some predictive ability with respect to subsequent 12-month S&P 500 total returns.”

In the past, the consensus equity allocation on Wall Street has been able to signal the opposite of what strategists recommend, meaning it has been a bearish indicator when analysts have been bullish, and vice versa.

Now, the sell-side indicator hovered in “neutral” territory during the first half of the year, but is now approaching “buy” after recent declines.

Meanwhile, analysts noted that the equity risk premium had risen, suggesting that markets are pricing in an 80% chance of a mild recession and a 30% chance of a “full” downturn.

The movements in these key indicators align with the bank’s expectation of a mild recession in the second half of 2022, analysts noted.

The United States has just recorded two straight quarters of negative growth – the technical definition of a recession – and analysts added that business sentiment on earnings calls has deteriorated as talk of weak demand is growing.