A growing number of “bear market signposts” are signaling that the market could be approaching a top and that investors should take profits now before a pullback, according to Bank of America.
Of the bank’s 10 bear-market signposts, five had triggered by April, strategists led by Savita Subramanian wrote in a recent client note. In May, two more of those indicators flashed red.
First, high price-to-earnings ratio (P/E) stocks lead low P/E stocks by a wide margin, “a sign of excessive speculation.” Second, “lofty long-term growth expectations” have breached levels consistent with equities being “more vulnerable to disappointment.”
While the S&P 500 (^GSPC) has returned 8% on the year, the benchmark index is “statistically expensive on 17 of 20 metrics, and trades rich versus its tech bubble metrics on eight,” the strategists wrote.
In the tech sector, which dominates the S&P 500 in terms of market value, strategists have seen the widest dispersion, with the spread between the best- and worst-performing quintiles’ median stock at its widest since February 2000.
Tech sector fundamentals are largely healthier than they were before the pop of the dot-com bubble, but many of those measures are getting worse, the strategists noted. Cash flow conversion has flat-lined, and investment-grade credit and equity supply have increased. Buybacks as a percentage of market cap have slowed, and capex as a percentage of operating cash flow for hyperscalers is expected to reach near 100% by the end of the year.
“Extreme price action may signal rising instability,” the strategists wrote.
