Are U.S. stocks overheating? Bank of America warns: 70% bear market indicator signals red light, revealing major macroeconomic risks

U.S. Bank warns that the U.S. stock market is overheating, with 70% of bear market indicators triggered. The S&P 500 index's multiple valuations are expensive, with year-end target prices lowered to 7,100 points, and internal performance of tech stocks has become more polarized, reaching levels not seen since 2000.

Bank of America Securities recently released a new report on the U.S. stock market, indicating that more and more bear market indicators have been triggered, advising investors to remain cautious at market highs. Among the bear market signals tracked by BofA, 70% are flashing red, consistent with the average levels seen at market peaks in history.

Overall, 17 out of 20 valuation metrics for the S&P 500 show statistical overvaluation, with 8 metrics exceeding levels seen during the tech bubble.

Despite the market facing pressure, the firm emphasizes that not all stocks are bearish, urging investors to focus on select individual stocks rather than holding the entire market cap-weighted index. Currently, BofA's year-end target for the S&P 500 remains at 7,100, below yesterday’s close of 7,386.65. The report reminds market participants to watch for potential instability amid extreme price volatility and to review asset allocations accordingly.

BofA’s multiple macroeconomic and credit indicators suggest potential stress

BofA’s analysis model covers consumer confidence data, economic growth expectations, M&A scores, and credit stress indicators. Notably, the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) released in May shows that consumer borrowing and demand continue to slow, reflecting the tightening of overall financial conditions.

Additionally, stocks with high price-to-earnings ratios (P/E) are outperforming those with low P/E ratios significantly. Strategists note that such extreme valuation gaps often signal excessive market speculation, and investors should be alert to potential risks arising from changes in the macroeconomic and credit environment.

Tech stocks’ internal performance divergence hits 2000s high

Although the S&P 500 has recently performed steadily, BofA’s team believes this masks significant internal disagreements within the market. Data since 1986 shows that the performance gap between the top and bottom quintile of tech stocks has widened to the highest level since February 2000.

Expanding the scope to the entire index, over the past three months, the performance gap between the top 10% and bottom 10% of constituent stocks has also reached its highest point since the COVID-19 pandemic outbreak. This high concentration suggests that the underlying structure supporting the market rally may not be as solid as it appears.

Healthy fundamentals but capital expenditure under pressure

From a fundamental perspective, some tech stocks remain healthy in terms of leverage and capital intensity, but signs of weakening have emerged compared to recent periods. The report notes that corporate cash flow conversion rates have stagnated, issuance of investment-grade bonds and stocks has increased, and share buybacks as a proportion of market cap are beginning to slow.

Particularly noteworthy is that for large-scale cloud service providers, their capital expenditure as a share of operating cash flow is expected to approach 100% by the end of this year, far above the 40% in 2023. The sharp rise in capital spending could squeeze future flexibility, which industry players should monitor closely.

• This article is reprinted with permission from: 《Chain News》
• Original title: 《BofA Warns of Overheated U.S. Stocks! 70% Bear Market Indicators Triggered》
• Original author: Florence