Bank of America (BAC) is urging investors to exercise greater caution toward U.S. equities as a growing number of internal bear market indicators flash warning signals simultaneously.
In a research note, strategists led by Savita Subramanian said there are “too many red flags” and advised clients to “take profits” at current levels.
The firm estimates that roughly 70% of its bear market signals have recently been triggered, a level broadly consistent with conditions observed near previous market peaks.
BofA also concluded that the S&P 500 appears statistically expensive on 17 of its 20 valuation measures, with the index trading above certain tech-bubble-era levels on eight separate metrics.
The indicators flagged by the firm include consumer confidence data, growth expectations, merger and acquisition scores, credit stress measures, and Federal Reserve lending survey conditions.
Tech sector fundamentals have broadly deteriorated since a prior BofA analysis in November, despite some areas such as leverage and capital intensity remaining relatively healthy.
Subramanian noted that “cash flow conversion has flat-lined, investment grade and equity supply has increased, buybacks as a percent of market cap have slowed and capex as a percent of operating cash flow for hyperscalers is forecast to reach nearly 100% by year-end, up from 40% in 2023.”
She added that “extreme price action may signal rising instability,” pointing to concentration risk as one of three specific threats the broader market is currently underpricing.
BofA also cited equity supply and demand dynamics as a second risk, warning that a market dependent on favorable conditions to stay elevated is structurally more fragile than one supported by broad buying.
Geopolitical risk rounds out the firm’s three key concerns, with BofA arguing that conflict-driven oil price increases and trade disruptions have not been fully absorbed into current stock valuations.
Despite the cautious overall tone, BofA’s strategists stopped short of abandoning equities entirely, drawing a sharp distinction between index-level exposure and individual stock selection.
“We see opportunity in S&P 500 stocks, but not the overall cap-weighted index,” Subramanian said, with the firm holding a year-end S&P 500 target of 7,100 against recent trading near 7,450.
BofA expressed a contrarian bullish view on U.S. consumer discretionary stocks, noting the sector’s equal-weighted performance relative to the S&P 500 has dropped to levels last seen during the 2008 financial crisis and the COVID-19 collapse.
Globally, the consumer discretionary sector is also trading at three-year lows versus energy stocks, leading BofA to argue the sector has already priced in stagflation risks more aggressively than other parts of the market.
Commodities are also highlighted as a preferred hedge against inflation, dollar weakness, and ongoing geopolitical instability, with strategist Michael Hartnett writing that “who owns the chips, rare earths, minerals, oil, wins the AI war.”
