Bank of America Securities said investors should be cautious about the U.S. stock market, as growing “bear market signals” suggest a potential peak is near.
The strategist team led by Savita Subramanian wrote in a report on June 5: “There are too many warning signs.” They recommended “taking profits.”
Strategists say that about 70% of bear market signals have recently been triggered, consistent with the average during previous market peaks. Subramanian noted that the S&P 500 is “statistically overvalued on 17 out of 20 indicators and overvalued relative to tech bubble levels on eight indicators.”
These indicators include consumer confidence data, growth expectations, merger and acquisition ratings, credit stress, and tightening conditions metrics such as the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS). Released in May, SLOOS showed persistently weak consumer demand. Additionally, high-earning stocks have significantly outperformed low-earning ones, which strategists view as a “sign of excessive speculation.”
Subramanian said the gap between the top and bottom fifth of stocks in the technology sector has reached its largest level since February 2000. She added that the strong performance of the S&P 500 “has masked its internal turmoil,” with the yield gap between the top and bottom decile of index stocks surging to its highest level since the pandemic, based on data from 1986 through May this year.
Some tech stocks still maintain healthy fundamentals, such as leverage ratios, valuations, and capital intensity. However, since U.S. Bank released its analysis report in November, the fundamentals of most tech stocks have deteriorated.
Subramanian noted that it is worth observing that “cash conversion rates have stalled, investment-grade and equity supply have increased, the proportion of stock buybacks to market value has slowed, and capital expenditures by hyperscale data center operators are expected to approach 100% of operating cash flow by year-end, up from 40% in 2023.” She warned: “Extreme price volatility may signal escalating instability.”
Even so, individual stocks may still outperform the overall market.
“We see investment opportunities in the S&P 500 constituents, but not in the index as a whole when weighted by market capitalization,” Subramanian said. She set her year-end target for the S&P 500 at 7,100 points; the index closed up 0.3% on Monday at around 7,406.
