Bank of America Eases S&P 500 Bear Market Warning as Risk Indicators Improve

Bank of America has downgraded its bear-market warning for the S&P 500, telling clients its market signals have shifted from red to yellow. The change reflects a moderation in key risk indicators, although the bank continues to flag persistent concerns around valuation and the credit cycle.

Risk Indicators Moderate

According to a note from BofA strategist Savita Subramanian, the share of the bank's proprietary bear-market signposts that have been triggered has decreased. At the end of May, 70% of these signposts were activated, placing the market in a high-risk "red-flag territory" based on historical data.

That figure has since fallen to 60%, prompting the shift to a more cautious "yellow" signal. The bank attributed this improvement to two main factors:

• Improving credit conditions
• Normalization of "frothy price action" within the technology sector

Lingering Headwinds and Cautious Outlook

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Despite the improved signal, BofA remains cautious about future performance. With 60% of bear-market signposts still triggered, historical data suggests a median next-12-month S&P 500 return of an underwhelming 3%, the bank noted.

On valuation, BofA observed that the S&P 500's forward price-to-earnings multiple has compressed to 20 times from 22 times at the start of the year as earnings growth outpaced stock price appreciation. However, the bank's long-term valuation model still implies potential annualized losses of 3% over the next decade. Furthermore, BofA warned that credit cycles often "start slow & benign and end fast & painfully."

Strategic Positioning

In this environment, the bank favors large-cap value stocks as a defensive ballast for investor portfolios. BofA specifically highlighted opportunities in sectors such as oil and gas, distributors, metals and mining, banks, and insurance.

Conversely, the firm warned investors to avoid potential "value traps." It identified media and IT services as areas of concern, where stock price deterioration is outpacing downward revisions to earnings estimates.