The S&P 500 is close to the market peak based on how many “bear market markers” it hits, says Bank of America: a whopping 60%

Subramanian’s team argued that investors must be increasingly selective, as the broad index has become “statistically expensive in every way”. All 20 valuation metrics her team tracks are at exorbitant levels, and in fact have never been more expensive in several key areas, including market capitalization to GDP. The S&P 500 is also trading above its Tech Bubble levels on nine different metrics, Subramanian’s team noted.

Bank of America’s methodology follows 10 signals that tend to precede cyclical market tops. Currently, six of these 10 are in play, including high price-to-earnings ratios, extreme outperformance of highly diversified stocks compared to cheaper stocks, and easing credit conditions. Historically, major market peaks have occurred when approximately 70% of these indicators have been activated, making today’s level of 60% alarmingly close. According to strategists at Bank of America, “these bear market signs — the catalysts that typically precede the S&P 500 peak — suggest more caution.”

Subramanian is not the only analyst calling for caution. said Lisa Shalit, CIO at Morgan Stanley Wealth Management luck Earlier this month, she was concerned about a “Cisco moment,” like when the dot-com bubble burst and that stock lost 80% almost overnight. She emphasized that artificial intelligence (AI) almost completely dominates the S&P 500, accounting for 75% of gains, 80% of profits and 90% of capital expenditures since the rally began in the past few years. She added that she is not worried about the next nine months per se, but is “very worried” about what comes next.

Bank of America semiconductor analyst Vivek Arya was more optimistic, arguing that… luck Companies are more concerned about maintaining strong capital expenditure levels for 2025 than about the impending downturn. However, Arya said he was confident about the next 12 months and the next five years, but “could there be digestive periods in between? Yes.”

Market drivers and emerging risks

The new Bank of America report also highlights potential cracks beneath the surface of the market. While the recent gains have been driven by the resilience of big-ticket technology stocks and the continued strength of the American consumer, strategists warn that these drivers may be conflicting. For example, artificial intelligence – one of the hottest topics in the market – could reduce demand for professional services, which could impact a region that has driven much of consumption growth since the 1980s.

Subramanian had previously said luck They see AI as the key to solving the famous “productivity paradox” identified by Nobel laureate Robert Solow: the idea that computers are visible everywhere except in productivity statistics. She said she sees hints in data going back to around 2022 that S&P 500 companies have learned how to work harder and smarter, often replacing people with processes. “The process is almost free and repeatable forever,” she said, adding that it is a more complex story than artificial intelligence replacing workers, but a fundamental shift in how work gets done.

However, it warned in October that risks were rising in the rapidly evolving world of private lending. Since the 2008 financial crisis, non-bank lenders have replaced traditional banks, and instability in private credit may force pension funds and other large investors to sell S&P 500 index funds, potentially exacerbating volatility. The dominance of passive investing heightens concerns — if these asset holders turn short, liquidity in the S&P 500 could dry up alarmingly quickly.

Subramanian highlighted the AI ​​sector, writing that “AI financing has formed a difficult knot that includes massive caps, transfer payments, and even the US government,” referring to The famous legend about how Alexander the Great He encountered a knot so tangled that he had no use but to cut it with a sword. Participation of the United States government in obtaining an equity interest IntelFor example, Nvidia’s centrality to the story, there were other hints. This “is not a risk in itself, but it is a complicating factor,” Subramanian said.

The unexpected US government shutdown last October and renewed trade tensions with China added uncertainty to an already uncertain macroeconomic environment, slowing project planning and economic activity. Bank of America also points to a record 54% of investors who now believe AI stocks are in a bubble, according to its latest survey of global fund managers — another reason to increase vigilance about the market’s turbulent exuberance.

As investors stare at a market in which euphoria and real risk go hand in hand, Bank of America’s warning of a 60% decline is a timely reminder: Cycle tops may only become clear in hindsight, but the flashing risk signals are here now.