Bank of America's head of US equity and quantitative strategy, Savita Subramanian, has warned that the stock market is displaying signals that have historically preceded a 20% correction. In an investor note reported by Axios, Subramanian stated that 70% of the firm's bear market signposts are currently triggered, matching the average observed at prior market peaks. The strategist identified multiple warning indicators including high investor profit expectations, relaxed credit conditions, and extreme valuation dispersion in the technology sector reaching levels last seen in February 2000.
BofA's Bear Market Indicators Show 70% Trigger Rate
Subramanian urged investors to "take profits," stating she is seeing "too many red flags" in the market. According to the analyst, "Our bear market signposts — the triggers that typically precede an S&P 500 peak — suggest additional caution may be warranted. Today, 70% of our signposts are triggered, in line with the average observed in prior market peaks."
The signposts function as market condition gauges. Subramanian identified several triggered indicators including the investor assumption that companies will continue generating profits at a strong pace in coming years, as well as relaxed credit conditions.
Tech Sector Valuation Dispersion Reaches 2000 Levels
Subramanian highlighted extreme dispersion in the performance of stocks with high and low price-to-equity ratios. High-valuation stocks are being rewarded while low-valuation stocks are being left behind.
"Dispersion has been most pronounced within Tech, where the spread between the best/worst-performing quintiles' median stock is a whopping +120 [percentage points], the highest since Feb. 2000, which reached +130 [percentage points] ahead of the market peak of March 24, 2000," Subramanian stated.
Morgan Stanley Analyst Disagrees on Bear Market Outlook
Morgan Stanley CIO Mike Wilson presented a contrasting view, stating he does not believe the stock market will enter bear territory. Wilson said, "In our view, a correction was inevitable and ultimately healthy if this bull market is going to extend into year-end, which remains our baseline."
FAQ
What percentage of Bank of America's bear market indicators are currently triggered?
According to Savita Subramanian, 70% of Bank of America's bear market signposts are currently triggered, which is in line with the average observed at prior market peaks.
What level has Tech sector valuation dispersion reached?
The spread between the best and worst-performing quintiles' median stock in the Tech sector has reached +120 percentage points, the highest level since February 2000, when it reached +130 percentage points ahead of the March 24, 2000 market peak.
Does Morgan Stanley agree with the bear market warning?
No. Morgan Stanley CIO Mike Wilson stated he does not believe the stock market will enter bear territory, viewing a correction as "inevitable and ultimately healthy" for the bull market to extend into year-end.
