BofA sees 'red flags' in the U.S. stock market. Here's what to buy now.

MW BofA sees 'red flags' in the U.S. stock market. Here's what to buy now.

By Isabel Wang

The BofA team sees opportunity in some individual S&P 500 stocks rather than the broader market-cap-weighted index

Most investors who pile into the S&P 500 in 2026 think they own the entire stock market. What they actually own is nothing more than a heavy bet on Big Tech - and right now, strategists at BofA Global Research think that bet has run its course.

The opportunity, they think, is in the sectors nobody wanted before.

Despite a sharp pullback last week, the seemingly relentless rally in the S&P 500 SPX over the past few months has shown nothing but a deeply divided stock market. A team of strategists at BofA Global Research, led by Savita Subramanian, said the rally has triggered "70% of the signposts" of a bear market, which typically precede a peak on the S&P 500 and warn that additional caution should be taken by investors.

"Red flags emerged over the past month, pointing to a soft patch ahead for the S&P 500 index and for tech," Subramanian and her team said in a client note. "High P/E stocks led low P/E stocks by a wide margin, a sign of excessive speculation," they said.

The price-to-earnings (P/E) ratio is a valuation metric calculated by dividing a company's stock price by its earnings per share (EPS) for the coming 12 months. A high P/E ratio means investors expect rapid future profit growth for the company, but it can also show that a stock is overvalued.

Another bear-market signal indicates "lofty" long-term growth expectations for the S&P 500, which have breached "levels consistent with equities being more vulnerable to disappointment," the BofA Global team added.

The spread between the S&P 500's best and worst performers is also near levels last seen during the COVID-19 pandemic.

Within the information-technology sector of the S&P 500, that dispersion has become even more pronounced. The spread between the median return of top- and bottom-performing quintiles over the last three months is the highest since February 2000, according to data compiled by the team (see chart below).

SOURCE: FACTSET, BOFA U.S. EQUITY AND QUANT STRATEGY

Megacap technology stocks, mainly AI and chip names, have done most of the heavy lifting in a year that has seen the S&P 500 rise nearly 9% year-to-date - despite the high degree of market uncertainty around the Iran conflict, how high inflation might go and interest-rate outlook under the new Fed Chairman Kevin Warsh.

See: The key to the upcoming Fed meeting? How Warsh reacts to all the hints of a rate hike.

Interestingly, stock valuation, represented by the forward P/E ratio of the S&P 500, has actually fallen, compared with earlier this year. As of Friday afternoon, the S&P 500's forward P/E ratio has fallen to 20.77 from 22.18 on Jan. 1, according to FactSet data.

That's because companies' EPS outlooks, especially in technology and energy sectors, are rising faster than stock prices, so valuation multiples are being compressed.

The S&P 500's energy XX:SP500.10 and information-technology XX:SP500.45 sectors have been among the best performers among the large-cap index's 11 sectors so far this year, up 28.7% and 19.5%, respectively, according to FactSet data. At the other end of the spectrum, financials XX:SP500.40, healthcare XX:SP500.35 and consumer discretionary XX:SP500.25 have seen losses so far this year, despite positive revisions to their EPS, according to BofA Global.

"Selectivity is key," Subramanian and her team said. That's why they prefer individual stocks in the S&P 500 instead of the broader market-cap-weighted large-cap index.

The BofA Global strategists also reiterated their year-end price target of 7,100 for the S&P 500, which indicates a 4.5% downside from its Monday afternoon level of 7,430, according to FactSet data.

U.S. stocks were mostly higher on Monday afternoon as technology stocks bounced back from Friday's selloff. The Dow Jones Industrial Average DJIA was off 0.1%, but the S&P 500 was rising 0.6% and the Nasdaq composite COMP was popping 1.2%, according to FactSet.

-Isabel Wang

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June 08, 2026 14:05 ET (18:05 GMT)

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