(Bloomberg) — Investors should exercise caution regarding US stocks as an increasing number of “bear market signposts” point to an approaching top, according to Bank of America Securities.
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There are “too many red flags,” strategists led by Savita Subramanian wrote in a note dated June 5. “Take profits,” they advise.
Some 70% of those bear-market signals have recently been triggered, in line with the average observed during prior market peaks, the strategists said. The benchmark S&P 500 Index was “statistically expensive on 17 of 20 metrics, and trades rich versus its tech bubble metrics on eight,” Subramanian said.
Measures include consumer confidence data, growth expectations, M&A scores, and credit stress as well as tightening conditions indicators, like the Federal Reserve’s Senior Loan Officer Opinion Survey, known as the SLOOS. The latter, released in May, showed consumer demand continued to soften. Additionally, stocks with high price-to-earnings ratios were leading those with low multiples by a wide margin, a “sign of excessive speculation,” according to the strategists.
Within technology, the spread between the best and worst performing quintiles was the widest it’s been since February 2000, Subramanian said. She added that strong performance for the S&P 500 has “masked internal drama,” with the difference between returns for the top and bottom-performing 10ths of index stocks over the last three months jumping to a post-Covid era high. She cited figures from 1986 through May.
Some tech-stock fundamentals are healthy, like leverage, valuation and capital intensity. However, most have worsened since a BofA analysis in November. Notably, “cash flow conversion has flat-lined, investment grade and equity supply has increased, buybacks as a percent of market cap have slowed and capex as a percent of operating cash flow for hyperscalers is forecast to reach nearly 100% by year-end, up from 40% in 2023,” Subramanian said.
“Extreme price action may signal rising instability,” she warned.
Even so, individual stocks may yet outperform.
“We see opportunity in S&P 500 stocks, but not the overall cap-weighted index,” Subramanian said. Her year-end S&P 500 year-end target is 7,100; the index closed 0.3% higher at roughly 7,406 on Monday.
