Bank of America is warning investors that the U.S. stock market may be flashing too many danger signs after a powerful rally driven by artificial intelligence, technology, and semiconductor stocks.
In a research note published Friday and first reported by Bloomberg, Bank of America's head of U.S. equity and quantitative strategy, Savita Subramanian, delivered an unusually direct message to investors, saying that there are "Too many red flags. Take profits."
Subramanian's concern centers on what Bank of America calls its "bear market signposts," a collection of market indicators that historically have appeared before major peaks in the S&P 500. "Our bear market signposts, the triggers that typically precede an S&P 500 peak, suggest additional caution may be warranted," she wrote. "Today, 70% of our signposts are triggered, in line with the average observed in prior market peaks."
The indicators track a variety of market conditions, including unusually optimistic expectations for future earnings growth, easy access to credit, elevated valuations, and growing disparities between different categories of stocks.
According to Bank of America, the gap between the best-performing and worst-performing technology stocks has reached levels not seen since the height of the dot-com era. Subramanian noted that the spread between the median returns of the strongest and weakest groups of technology companies has widened to approximately 120 percentage points.
"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," she wrote.
The comparison has raised eyebrows because the same measure reached roughly 130 percentage points just before the bursting of the dot-com bubble. The Nasdaq peaked on March 24, 2000, before suffering one of the most dramatic collapses in market history.
While Bank of America stopped short of predicting an imminent crash, the note suggests investors should be wary of a market increasingly driven by a relatively small group of winners, particularly companies tied to artificial intelligence and semiconductor demand.
Not everyone on Wall Street agrees with the bearish interpretation. Morgan Stanley chief U.S. equity strategist Mike Wilson argued that the recent pullback may actually be beneficial for the market's long-term health.
"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," Wilson wrote in a separate note cited by Axios.
