Bank Of America Warns Of Too Many Red Flags In US Stock Market

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Bank Of America Warns Of Too Many Red Flags In US Stock Market

Bank of America Securities’ Savita Subramanian is warning that red flags are building across the US stock market after a powerful rally left the S&P 500 crowded, expensive and heavily dependent on a narrow group of winners.

Subramanian, Bank of America’s head of U.S. equity and quantitative strategy, pointed to parallels with early 2020 and said she still likes stocks, but not the index. Her year-end S&P 500 target remains 7,100, below recent trading levels, while BofA’s latest market work shows seven of ten bear-market indicators now triggered.

The pressure points are concentrated in the same places that drove the rally higher. Technology and communication-services stocks still have momentum and earnings support, but valuations are stretched. High price-to-earnings stocks have been leading cheaper stocks by a wide margin, a setup BofA links to excessive speculation rather than broad market strength.

The bank is also watching market internals. Return dispersion has jumped to post-COVID highs, meaning the headline index has hidden larger performance gaps beneath the surface. Inside technology, the spread between the best and worst performing groups has reached levels last seen around the 2000 tech bubble.

AI Capex And New Issuance Add Pressure

The warning lands as investors reassess how much of the AI trade is already priced in. Hyperscaler capital expenditure is expected to climb sharply, with BofA noting that spending as a share of operating cash flow could approach 100% by year-end, up from about 40% in 2023.

That creates a margin and free-cash-flow problem for the companies carrying the index. AI infrastructure spending can support long-term growth, but higher capex can also reduce the cash available for buybacks, dividends and balance-sheet flexibility. Buybacks have been an important support for US equities, especially large-cap technology.

New equity issuance is another warning sign. A wave of large IPOs, secondary offerings and capital raises can absorb liquidity from existing leaders, especially when valuations are already high. The same supply concern has followed the SpaceX IPO demand surge, where extreme investor interest has turned one listing into a broader test of market appetite.

BofA’s sector view is more selective than bearish. Energy ranks strongest in the bank’s tactical model, supported by momentum, earnings revisions and valuation. Financials, materials and staples also sit higher in the preference stack, while consumer discretionary and utilities are less favored.

Tech Rebound Faces A Higher Bar

The warning comes after a volatile stretch for AI and semiconductor stocks. A relief rally in Nasdaq 100 futures followed easing Middle East headlines, but the rebound came after a deeper reset in chip names and high-growth technology.

Individual winners are still moving sharply on AI supply-chain news. Intel recently surged after reports tied Google and Nvidia to possible backup manufacturing demand, reviving the Intel foundry turnaround trade even as investors questioned whether the rally was running ahead of confirmed orders.

Global stress has also shown how quickly AI exposure can turn into forced selling. South Korea triggered an emergency halt after the KOSPI plunged more than 8%, with chip and memory names hit hard during the broader unwind.

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Bank of America is not calling for a full exit from equities. The bank’s message is that index-level buying looks less attractive when valuation, concentration, issuance, capex and return dispersion are all flashing at the same time. The trade shifts from chasing the S&P 500 to choosing stocks and sectors where earnings revisions, valuation and cash flow still line up.

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Radu B

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Born globetrotter with international work experience, Radu is passionate about economics, international relationships, risk management, and technology. However, since discovering the crypto-verse, he started seeing things from a different perspective.

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