Wall Street Is Doing Something Investors Haven't Seen Since 2022. It Could Signal a Huge Move in Stocks.

The S&P 500 (^GSPC -0.33%) has come roaring back from the sell-off at the start of the year that escalated in April following President Donald Trump’s “retaliatory” tariff announcements. Over the three months from April 4 through July 4, the index climbed 24.2%, ranking as the eighth-best 13-week run in the index since 1989.

While stocks have rallied over the last three months, Wall Street analysts have only gotten more bullish. In fact, sell-side analysts haven’t been this bullish since 2022. And if recent history is any indication, a big move in stocks could be coming.

Growing confidence on Wall Street

There were over 12,000 ratings on stocks in the S&P 500 from Wall Street analysts as of the end of June. Of those ratings, 56.4% were buy (or its equivalent), according to data from FactSet Insight.

While analysts are typically bullish on the market, they’ve become increasingly bullish over the last few months. In October, buy ratings accounted for just 53.6% of all analyst calls. But Wall Street grew more bullish after President Trump’s election, and analysts remained confident as stock prices fell from February through April.

But even as stock prices have recovered, analysts haven’t changed their tune very much on whether the stocks in the S&P 500 are a good buy still. Wall Street has remained just as bullish throughout the 24.2% rally. And that suggests something very important about the near future of stocks in the index.

Here’s what happened last time analysts were this bullish

The last time Wall Street put out such a high percentage of buy ratings was in June of 2022. But in fact, analysts had been souring on stocks since February of that year, when a whopping 57.4% of all analysts’ ratings were buys.

By the time analysts had reached their peak bearishness in February 2023, with just over 53% of ratings being buys, the S&P 500 had fallen 17.2%. That includes a drawdown of 25.4% in October of 2022. Since the end of February of 2023, the S&P 500 has gone on to return over 56% in 28 months.

All this is to say that Wall Street has a tendency to get overly pessimistic and overly optimistic. When Wall Street continues to increase the percentage of buy ratings on the stocks they cover while stock prices are rising, it can usually end with a major sell-off. And that’s exactly what we’re seeing now.

Warren Buffett’s words of advice for markets like these

Warren Buffett shared a simple investment philosophy with Berkshire Hathaway shareholders in his 1986 letter that’s been repeated countless times since: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

While Wall Street as a whole appears to be getting greedy, maintaining a lot of buy ratings even after a strong run-up in stock prices, there are pockets of the market where there are opportunities.

Analysts are most bullish on market sectors closely tied to artificial intelligence (AI), the driving force behind the current bull market. Over 60% of ratings on energy, communication services, and technology stocks are buy (or its equivalent). On the other hand, consumer staples, utilities, and industrials haven’t received nearly as much love.

Taking the time to do your own research can pay off handsomely in this market driven by a small group of stocks. If you can find a company with a strong competitive advantage with a stock trading at fair value (or better), you could certainly outperform the S&P 500 over the long run. And if the analysts prove to be overly optimistic once again, you could see many more opportunities in the near future as stock prices come down and valuations become more appealing.