BofA Warns S&P 500 Valuation Floor May Be Lower as Correction Risks Rise
Analysts at Bank of America (BofA) have cautioned that the valuation floor for the S&P 500 could be lower than current market levels, warning that the risks of a correction in U.S. stocks are mounting after the recent rally.
In a client note, BofA strategists led by Savita Subramanian said the U.S. equity market is moving from “frothy to bubbly” territory. Out of 20 valuation indicators tracked by the bank, five have hit record highs, including the S&P 500’s market cap-to-GDP ratio, price-to-book, price-to-operating cash flow, and enterprise value-to-sales.
Overheated Valuations and Bubble Signals
The analysts added that four additional valuation measures — such as price-to-earnings, enterprise value to EBITDA, and the S&P 500’s ratio to both WTI crude oil prices and the Russell 2000 index — have surpassed levels last seen during the March 2000 dot-com bubble peak.
According to BofA, roughly 60% of their bear market indicators have now been triggered. These include high price-to-earnings ratios, the widening gap between expensive and cheap stocks, and credit market stress signals observed over recent months.
AI and Consumer Strength May Be Diverging
The report also warned that two long-time market drivers — artificial intelligence (AI) and U.S. consumer resilience — could soon clash. The strategists wrote that AI may reduce demand for professional services, particularly in sectors that have historically contributed most to consumer spending growth since the 1980s.
Additionally, they highlighted a shift in credit creation, with private lenders replacing big banks as dominant sources of financing — a structural change that emerged following the 2008 financial crisis.
Economic Uncertainty and Mixed Earnings
BofA noted growing uncertainty surrounding U.S. trade policy and tariffs, while the federal government shutdown has delayed key economic data, further obscuring the country’s growth outlook.
The analysts also cautioned that this earnings season may reveal “canaries and cockroaches” — early signs of hidden risks. They said industrial firms reported mixed results, pointing to macroeconomic uncertainty and limited upside from demand recovery. While banks delivered strong earnings, recent credit events suggested that “probably more cockroaches” could still surface.
BofA’s Advice: Stay Selective
Given the growing risks, the strategists advised investors to remain selective in their equity exposure and focus on high-quality companies with solid balance sheets.
