Bank of America is warning investors to take profits on U.S. stocks as a growing number of bear market indicators suggest the market may be approaching a peak.
The bank’s strategists said 70% of the warning signals they monitor have now been triggered, a level that has historically coincided with previous market tops.
In a note, the team led by Savita Subramanian highlighted mounting concerns across the stock market despite the S&P 500 remaining near record highs.
According to the bank, seven of the 10 bear market signposts it tracks were triggered in May, up from five in April and four in March.
The warning comes as the S&P 500 continues to trade at elevated valuations. Bank of America noted that the benchmark index is statistically expensive on 17 of 20 valuation metrics and exceeds technology bubble-era levels on eight measures.
The bank’s bear market indicators include consumer confidence, growth expectations, merger and acquisition activity, credit stress, and tightening lending conditions.
Recent data from the Federal Reserve’s Senior Loan Officer Opinion Survey also showed continued softening in consumer demand.
BofA’s strategists also pointed to rising speculative activity, with high price-to-earnings stocks significantly outperforming lower-valued companies.
A key concern is the growing divergence within the technology sector. The gap between the best and worst-performing tech stocks has widened to about 120 percentage points, its highest level since February 2000 and close to the 130-point spread seen before the dot-com bubble burst.
Masked market weakness
The bank added that gains in a handful of large technology stocks have masked weakening market breadth across the S&P 500, with the gap between top and bottom performers reaching a post-pandemic high.
While some tech fundamentals remain solid, Bank of America noted deteriorating trends in cash flow conversion, share buybacks, and capital allocation.
Capital expenditures by major hyperscale technology firms are projected to reach nearly 100% of operating cash flow by year-end, up from 40% in 2023.
Despite the warning, Bank of America believes select stocks could still outperform. However, the firm maintained its year-end S&P 500 target of 7,100, implying roughly 6% downside from current levels.
The warning adds to broader Wall Street concerns that a small group of large-cap technology stocks has driven much of the market’s gains, leaving the index vulnerable if sentiment weakens.
