BofA: 70% of bear-market signals triggered, time to take profits

Bank of America is telling clients to take profits. The bank says 70% of its bear-market indicators have now flashed, a level historically associated with market tops.

The 70% reading

The bank’s latest framework shows that seven of its ten bear-market indicators have now been triggered, placing the reading at roughly 70%. Two were added in May, five in April, and four in March, matching the average level observed ahead of the seven previous S&P 500 market peaks since 1990.

The signposts cover a wide range of market data, including consumer confidence, stock performance expectations, credit stress levels, and credit tightening conditions. The bank’s “Sell Side Indicator” has not officially triggered, but showed marked deterioration in May, with sentiment drifting toward extreme optimism.

Valuations look stretched

BofA said the S&P 500 looks statistically expensive on 17 of 20 valuation measures and is even trading above some tech-bubble-era levels on eight metrics.

Two newly triggered signals stand out: high-P/E stocks significantly outperforming low-P/E stocks, a classic sign of excessive speculation, and overly optimistic long-term growth expectations pushing valuations into a zone where stocks become highly sensitive to earnings disappointments.

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Tech dispersion echoes February 2000

The median return gap between the best- and worst-performing quintile stocks in the technology sector has reached approximately 120 percentage points, the highest level since February 2000, when the indicator hit around 130 percentage points before the market peaked on March 24, 2000.

The median stock in the top quintile of the current tech sector has gained roughly 110% over the past three months; during the dot-com bubble, similar stocks saw maximum gains of about 120% before the bubble burst.

AI capex is the other red flag

CAPEX at hyperscale cloud companies, including Microsoft, Amazon, Google, and Meta, is projected to approach 100% of operating cash flow by the end of this year, more than double the 40% level in 2023.

Cash flow conversion has stalled, supply of investment-grade bonds and equities has increased, and share buybacks as a percentage of market capitalization have slowed.

Not a crash call, a profit-take call

Subramanian has set her year-end S&P 500 target at 7,100, below the 7,400 level where the index traded on Monday. The strategists said they see opportunity in S&P 500 stocks, but not the overall cap-weighted index, noting the indicators point to a broader turndown.

Energy ranks strongest in BofA’s tactical model, supported by momentum, valuation, and earnings revisions, while financials, materials, and consumer staples rank higher, and consumer discretionary and utilities sit lower in the preference stack.

Options market and stocks to watch

Watch for positioning shifts across the names most exposed to BofA’s warning:

SPY: The direct read on the cap-weighted index BofA is calling expensive. Watch flow for hedging into the year-end 7,100 target zone.

QQQ: The tech-heavy index sits at the center of the dispersion warning. Watch put skew and downside protection.

NVDA: The poster child of the AI capex cycle BofA flagged. Watch for hedging if hyperscaler spend gets re-rated.

MSFT and META: Two of the hyperscalers named in the capex-to-cash-flow concern. Watch for options flow around capex guidance.

For more market news, keep an eye on how positioning evolves into the next round of macro prints.

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