Bank of America (BofA) has warned investors that the US stock market is showing several signs that have appeared before previous bear markets. BofA strategists led by Savita Subramanian said to Bloomberg News, there are “too many red flags” in the market right now and advised investors to consider taking profits. The warning comes even as major US stock indexes continue trading near record highs. BofA said around 70% of the warning signals that usually appear before a bear market have now emerged.
The bank said this level is close to the average seen during previous market peaks. According to BofA, the S&P 500 is currently overvalued on 17 out of 20 valuation measures. The bank further mentioned that valuations on 8 of those measures are even higher than they were during the Dot-com bubble. BofA’s valuation measures include indicators such as consumer confidence, growth expectations, merger-and-acquisition activity, and credit stress levels.
Tech stocks show big warning signs
The bank also noted that expensive stocks with high price-to-earnings (P/E) ratios have been performing much better than cheaper stocks. BofA described this trend as a sign of excessive speculation in the market. One of the biggest concerns highlighted by the bank is the growing gap between winning and losing technology stocks.
BofA analysed technology stock performance data from 1986 through May 2026. The bank found that the performance difference between the top 20% and bottom 20% of US technology stocks has reached its widest level since February 2000.
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Top 20% of tech stocks lead the rally
The Kobeissi Letter shared on X with a graph sourced by BofA showed that the top 20% of US technology stocks have outperformed the bottom 20% by about 120 percentage points over the last three months. The research said this is the second-highest reading ever recorded. For comparison, the gap reached about 135 percentage points during the peak of the dot-com bubble in 2000. The Kobeissi Letter said the performance spread has quadrupled over the past year. It added that the increase is happening faster than the surge seen during the 1999-2000 dot-com era.
The top 20% of technology stocks have generated returns of about 110% over the last three months. During the same period, the bottom 20% of technology stocks have lost around 10%. The report said technology stock gains are now being driven by a very small group of companies. The Kobeissi Letter described the current rally as one of the most concentrated technology rallies on record.
S&P 500 rally hides market weakness
Subramanian said the strong gains in the S&P 500 are hiding weakness beneath the surface of the market. She said the market’s headline performance is masking significant internal turmoil among stocks, as noted by Bloomberg.
According to BofA, the performance gap between the top 10% and bottom 10% of S&P 500 companies has jumped to its highest level since the COVID-19 pandemic. Despite the warning signs, BofA said some technology companies still have strong fundamentals.
The bank noted that debt levels, valuations, and capital spending needs remain relatively healthy for some firms. However, BofA said most of its key indicators have worsened since its previous review in November. Subramanian said free cash flow conversion has stopped improving and is now stagnating. She also noted an increase in both investment-grade corporate bond issuance and stock issuance, as per Bloomberg report.
According to BofA, the pace of share buybacks compared with overall market value has slowed. The bank also expects large cloud and AI-focused companies, often called hyperscalers, to spend much more on infrastructure. BofA estimates that capital expenditures as a share of operating cash flow for hyperscalers could rise from 40% in 2023 to nearly 100% by the end of 2026.
BofA still sees stock opportunities
Even with its broader market concerns, BofA said investors can still find attractive opportunities in individual stocks. There are investment opportunities among individual S&P 500 companies, said Subramanian, Bloomberg report. However, she added that BofA does not see the same opportunity in the market-cap-weighted S&P 500 index as a whole.
While BofA is being careful in its outlook, it did not change its S&P 500 target for the end of the year. That target is about 4% below the index’s recent closing level of 7,406, suggesting limited upside from current levels.
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