S&P 500 Remains Expensive Despite Market Volatility, BofA Says
The S&P 500 continues to trade at elevated valuation levels, even after recent market volatility, according to a new analysis from Bank of America.
In a note released Friday, strategist Savita Subramanian stated that the benchmark index is “statistically expensive on 18 of 20 valuation metrics,” with four measures close to record highs. The findings reinforce BofA’s expectation that the market could face earnings-driven multiple compression in the coming years.
BofA Maintains Cautious 2026 Target
Bank of America currently holds one of the lowest year-end 2026 targets on Wall Street for the S&P 500, projecting the index at 7,100.
While the bank’s earnings forecast sits at the higher end of estimates — calling for 14% growth — Subramanian noted that this outlook implies significant price-to-earnings (PE) compression. Importantly, she clarified that the forecast is not based on valuation mean reversion. Instead, BofA sees compelling macroeconomic and fundamental reasons for PE multiples to decline further, including within the technology sector.
Software Sector Highlighted as Emerging Value Opportunity
Interestingly, BofA identified the software sector as a newly emerging value opportunity. Software stocks have been the worst-performing industry so far in 2026, falling 20% year-to-date.
Valuations in the sector have dropped to decade lows, partly due to concerns surrounding artificial intelligence. The group now trades roughly 20% below its long-term average, although it still carries a modest premium compared to the broader S&P 500.
Despite the recent pullback, BofA cautioned investors against expecting a rapid valuation rebound in either software stocks or the broader index.
Five Drivers Point to Lower PE Multiples
Bank of America outlined five key factors that could pressure valuation multiples going forward.
One major factor is what the bank calls “disruption math,” where falling stock prices often lead to subsequent earnings downgrades. Additionally, a potential surge in mega-IPO activity could create a glut of new equity issuance, increasing supply and weighing on valuations.
Historical trends also support caution. According to BofA, years with strong earnings per share (EPS) growth have resulted in PE multiple compression 66% of the time.
Other risks include rising asset intensity, higher corporate leverage, and potential index volatility stemming from private market disruptions. Together, these factors suggest further downside risks for S&P 500 valuations.
