STOCKS | BofA Securities Urges Caution on U.S. Stocks as Bearish Signals Near Market-Top Levels

BofA Securities said investors should remain cautious on U.S. equities, citing a growing number of bear-market signals that suggest the market is nearing a top.

According to Jin10, a strategist team led by Savita Subramanian wrote in a report dated June 5 that about 70% of their bear-market signals had been triggered, in line with the historical average seen around past market peaks.

The team said the S&P 500 appeared “statistically overvalued” on 17 of 20 valuation measures, with eight indicators above levels seen during the tech bubble period. They also noted that high price-to-earnings stocks had significantly outperformed lower-valuation stocks, which they described as a sign of “excessive speculation.”

Within the technology sector, the gap between the best- and worst-performing quintiles widened to its highest level since February 2000. The strategists said the S&P 500’s strong headline performance had masked sharp internal divergence, with the return spread between the top 10% and bottom 10% of index constituents over the past three months rising to its highest level in the post-pandemic era.

While some technology stocks still showed healthy fundamentals, Subramanian said cash-flow conversion had stalled, investment-grade bond and equity supply had increased, and buybacks as a share of market capitalization had declined. She added that capital expenditures by hyperscale cloud companies were expected to approach 100% of operating cash flow by year-end, up from 40% in 2023.