A growing number of “bear market signposts” are signaling that the market could be approaching a top and that investors should take profits now before a pullback, according to Bank of America.
Seven of the bank’s 10 bear market indicators have been triggered in recent months, strategists led by Savita Subramanian wrote in a recent client note. Five were triggered by April, and two more of those indicators flashed red in May.
The bank’s “signposts” cover a wide range of market data, including consumer confidence, stock performance expectations, credit stress levels, and credit tightening conditions.
One indicator showed that high price-to-earnings ratio (P/E) stocks led low P/E stocks by a wide margin, “a sign of excessive speculation.” Additionally, “lofty long-term growth expectations” have breached levels consistent with equities being “more vulnerable to disappointment.”
While the S&P 500 (^GSPC) has returned 8% so far this year, the benchmark index is “statistically expensive on 17 of 20 metrics, and trades rich versus its tech bubble metrics on eight,” the strategists wrote.
In the tech sector, which dominates the S&P 500 in terms of market value, strategists have seen the widest dispersion, with the spread between the best- and worst-performing quintiles’ median stock at its widest since February 2000.
Tech sector fundamentals are largely healthier than they were before the dot-com bubble popped, but many of those measures are worsening, the strategists noted. Cash flow conversion has flat-lined, and investment-grade credit and equity supply have increased. Buybacks as a percentage of market cap have slowed, and capital expenditures as a percentage of operating cash flow for hyperscalers are expected to reach near 100% by the end of the year.
“Extreme price action may signal rising instability,” the strategists wrote.
That’s not to say individual stock picks can’t do well.
“We see opportunity in S&P 500 stocks, but not the overall cap-weighted index,” the strategists said, noting that the indicators point to a broader turndown.
Subramanian has set her year-end S&P 500 target at 7,100, below the 7,400 points where the index traded on Monday.
Jake Conley is a breaking news reporter covering US equities for Yahoo Finance. Follow him on X at @byjakeconley or email him at jake.conley@yahooinc.com.
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