Bank of America (BofA) updated its equity risk framework on Monday, moving the S&P 500 signal from red to yellow as 60% of its bear‑market signposts have now been triggered. The change reflects improving credit conditions, according to strategist Savita Subramanian.
The bank noted that by the end of May, 70% of its signposts had been hit, but a recent easing in credit spreads reduced the proportion to 60%. When the 60% threshold is reached, BofA’s historical median return for the next 12 months is about 3%, a modest gain that the firm describes as “underwhelming.”
BofA also highlighted a compression in the S&P 500’s forward earnings multiple, which fell from 22 times at the start of the year to roughly 20 times now. Its long‑term model projects an annualized loss of 3% over the next decade, based on the same credit‑cycle dynamics that have historically produced a “slow and benign start, fast and painful end.”
The strategist cited past stress episodes since the 1990s, noting that the first half of spread widening took six times longer than the second half, underscoring the speed of downside risk once it accelerates.
In terms of sector positioning, BofA recommends large‑cap value stocks as a ballast. Favored areas include oil and gas, distributors, metals and mining, banks and insurance. Conversely, the bank warns that media and IT services appear to be value traps, with price declines outpacing earnings estimate cuts.
Investors are advised to monitor credit‑cycle developments and adjust exposure accordingly, keeping an eye on the evolving forward multiple and the proportion of risk signposts that have been triggered.
