SAN FRANCISCO — A growing number of market indicators are signaling that U.S. stocks may be nearing a peak and investors should consider taking profits before a potential downturn, according to a new analysis from Bank of America.
The bank said seven of its 10 “bear market signposts” have been triggered in recent months, suggesting increasing risks for equity investors. Five of the indicators were activated by April, with two additional warning signs emerging in May, according to a research note led by Bank of America strategist Savita Subramanian.
The indicators track a range of market and economic conditions, including consumer confidence, investor expectations, credit stress and lending conditions.
The Warning Signs
Among the warning signs cited by the bank:
- High price-to-earnings stocks have significantly outperformed lower-valued stocks, which Bank of America described as a sign of excessive speculation.
- Long-term corporate growth expectations have reached levels that historically leave equities vulnerable to investor disappointment.
- Seven of the bank’s 10 bear market indicators have now been triggered.
The warning comes despite continued gains in the broader market. The S&P 500 has returned approximately 8% so far this year, but Bank of America said the benchmark index appears historically expensive by multiple measures.
According to the bank, the S&P 500 is “statistically expensive” on 17 of 20 valuation metrics it tracks and is trading at levels that exceed those seen during the technology bubble on eight valuation measures.
Even Stronger Signs
Bank of America said some of the strongest warning signals are emerging within the technology sector, which accounts for the largest share of the S&P 500’s market value.
Strategists noted that the gap between the best- and worst-performing technology stocks has widened to its largest level since February 2000, shortly before the collapse of the dot-com bubble.
While the bank said technology companies generally have stronger fundamentals today than they did during the late-1990s technology boom, several key measures are showing signs of deterioration.
Additional Findings
According to Bank of America:
- Cash-flow conversion rates have flattened.
- Investment-grade debt issuance and equity offerings have increased.
- Share repurchases as a percentage of market capitalization have slowed.
- Capital expenditures by hyperscale technology companies are expected to approach 100% of operating cash flow by the end of the year.
“Extreme price action may signal rising instability,” the strategists wrote.
The analysis stops short of forecasting an imminent market decline but suggests investors should be increasingly cautious as valuation levels rise and more historical bear-market indicators flash warning signs, according to Bank of America.
