Bank of America has downgraded its S&P 500 risk signals from red to yellow, citing a drop in bear-market indicators from 70% to 60% as credit conditions improve. The shift follows a note sent to clients on Monday, according to strategist Savita Subramanian.
The bank’s bear-market signposts had reached 70% by the end of May, placing equities in high-risk territory. Since then, improvements in credit markets have reduced the share of triggered indicators to 60%, signaling a moderation of systemic risks. Subramanian noted that frothy price action in technology stocks has also normalized, contributing to the reduced alert level.
The S&P 500’s forward price-to-earnings multiple has compressed from 22 times at the start of the year to 20 times currently. Historically, when 60% of the bank’s signposts are triggered, the median next-12-month return for the index stands at 3%. However, BofA’s long-term valuation model still implies annualized losses of 3% over the next decade.
Credit stress episodes since the 1990s have typically unfolded in two phases: a prolonged initial phase followed by a rapid acceleration in spreads. BofA observed that the first half of such moves has historically taken six times longer than the second half, underscoring the potential for sudden deterioration.
On positioning, the bank favors large-cap value stocks as a defensive play, recommending allocations to oil and gas, distributors, metals and mining, banks, and insurance. Sectors to avoid include media and IT services, which BofA identifies as value traps where price declines are outpacing earnings estimate reductions.
