BofA Says It’s Time to Take Profits as AI-Driven Stock Rally Flashes Warning Signs

70% of bear-market warning signals have been triggered

"S&P 500 is pricier than during the dot-com bubble on some measures"

Concerns grow over overheated Big Tech AI spending

Bank of America said warning signs resembling those seen before past bear markets are emerging across a stock market that has repeatedly hit records on artificial-intelligence enthusiasm. The bank said it is time to take profits in U.S. equities.

Bloomberg reported on June 8 that BofA strategists led by Savita Subramanian wrote in a report that there are "too many red flags" and recommended investors "take profits." About 70% of the bank’s bear-market warning indicators have already been triggered. That is close to the average level seen at major market peaks in the past.

BofA said its analysis of consumer confidence, economic-growth expectations, merger-and-acquisition indicators, credit stress and lending conditions suggests the market may have entered a peak zone. The S&P 500, the main U.S. stock benchmark, was statistically overvalued on 17 of 20 valuation metrics. Subramanian wrote that the index is trading at richer levels than during the tech bubble on eight of those measures.

The bank also said the recent rally has been concentrated too heavily in a narrow group of AI-related shares. The performance gap between the top 20% and bottom 20% of technology stocks has widened to its largest level since just before the 2000 dot-com bubble. Over the past three months, the return gap between the top 10% and bottom 10% of S&P 500 stocks has also expanded to its widest level since the Covid-19 pandemic.

The S&P 500’s strong advance is masking drama beneath the market’s surface, Subramanian wrote. Extreme price moves may be a sign that market instability is increasing.

She also highlighted a sharp rise in capital spending as competition in AI investment intensifies. According to BofA, capital expenditures by hyperscale cloud companies including Microsoft, Amazon, Google and Meta are set to approach 100% of operating cash flow by the end of this year. That would be more than double the roughly 40% level in 2023.

The bank also said investment-grade corporate bond issuance and equity supply have risen, while share buybacks have slowed and cash-generation capacity has stagnated. Even so, BofA said opportunities remain in individual stocks despite its broader caution on the overall market. Subramanian said the bank sees opportunities in S&P 500 constituents, but not in the market-cap-weighted index as a whole.

BofA maintained its year-end target for the S&P 500 at 7,100. That is about 4% below the June 8 close of 7,406.

Park Su-bin, Hankyung.com reporter waterbean@hankyung.com