Key Takeaways:
Bank of America's bear-market dashboard has reached a level that historically preceded every major S&P 500 peak since 1990.
The S&P 500 rose 0.6% to 7,430 on Monday, but Bank of America warned that 7 of its 10 bear-market signposts have now been triggered, matching the average seen ahead of prior market tops.
"There are too many red flags," Savita Subramanian, equity strategist at Bank of America, said in a June 5 client note. "Take profits."
The two new signals that flashed in May were the widening dispersion between the best and worst performers in the S&P 500 technology sector — a 120-percentage-point gap that rivals the dot-com bubble — and long-term growth expectations breaching levels consistent with equities being vulnerable to disappointment. The S&P 500's forward price-to-earnings ratio has compressed to 20.77 from 22.18 at the start of the year as earnings estimates have risen faster than stock prices, but the index remains "statistically expensive on 17 of 20 metrics," Subramanian said.
The warning comes as the S&P 500's 9% year-to-date gain masks a deeply divided market. Energy stocks have surged 28.7% while financials, healthcare and consumer discretionary have posted losses. Subramanian reiterated a year-end target of 7,100 for the S&P 500, implying about 4.5% downside from current levels.
Tech Concentration Nears Dot-Com Extremes
Within the information-technology sector, the spread between the median return of the top and bottom-performing quintiles over the past three months is the widest since February 2000, according to BofA data. The gap reached 130 percentage points just before the March 24, 2000 market peak. While some tech-sector fundamentals remain healthy — leverage, valuation and capital intensity — most have deteriorated since November. Cash flow conversion has flat-lined, buybacks as a percentage of market cap have slowed, and capital expenditure as a share of operating cash flow for hyperscalers is forecast to reach nearly 100% by year-end, up from 40% in 2023.
Where BofA Sees Opportunity
"Selectivity is key," Subramanian said. The strategist prefers individual S&P 500 stocks over the cap-weighted index, pointing to sectors where earnings revisions are positive but stock prices have lagged. The S&P 500's energy sector has led all 11 GICS groups with a 28.7% gain this year, while information technology has added 19.5%. At the other end, financials, healthcare and consumer discretionary have declined despite upward earnings revisions.
The S&P 500's Monday rebound came as chip stocks recovered from a 4% Friday selloff that snapped the index's nine-week winning streak. The VIX, Wall Street's fear gauge, remained elevated after Friday's spike as traders weighed the implications of a blowout May jobs report that strengthened the case for the Federal Reserve to raise interest rates later this year. The 10-year Treasury yield edged higher, while the dollar index held steady. Oil prices rose more than 1% after Iran and Israel exchanged strikes, with Brent crude trading near $95 a barrel.
This article is for informational purposes only and does not constitute investment advice.
