Bank of America is telling investors to take profits now, warning that a growing cluster of internal indicators is signaling the stock market may be approaching a top after months of gains driven heavily by a narrow group of AI-related technology stocks.

Seven of the bank’s ten bear market signposts have been triggered in recent months, according to a note to clients from strategists led by Savita Subramanian. 

Five of those indicators were triggered by April, and two more flashed warning signs in May, bringing the total to 70%.

What the Indicators Are Showing

The bank’s bear market signposts cover a broad range of market conditions, including consumer confidence readings, stock performance expectations, credit stress levels, and lending conditions.

Among the recently triggered signals, one showed that high price-to-earnings ratio stocks have dramatically outperformed low price-to-earnings stocks by a wide margin, which strategists described as a sign of excessive speculation. 

Another indicator showed that long-term growth expectations embedded in stock prices have reached levels that make equities more vulnerable to disappointment if those projections are not met.

The S&P 500 has returned 8% year to date, but the index is “statistically expensive on 17 of 20 metrics, and trades rich versus its tech bubble metrics on eight,” the strategists wrote. 

That valuation picture sits alongside a Shiller CAPE ratio that recently tied its highest level since the dot-com crash, compounding the concern about how little cushion the market has against negative surprises.

Tech Sector Dispersion Hits Widest Level Since 2000

Within the technology sector, which dominates the S&P 500 by market value, the internal divergence between winners and losers has reached an extreme not seen in more than two decades.

The spread between the best- and worst-performing quintiles of tech stocks is now at its widest point since February 2000, the month before the dot-com bubble began its collapse. 

That kind of dispersion, where a small group of names drives outsized gains while a large portion of the sector struggles, has historically been associated with the late stages of speculative rallies rather than the beginning of sustained broad-based growth.

Strategists acknowledged that tech sector fundamentals are generally healthier today than they were in 2000, when many of the most highly valued companies had no earnings at all. However, they noted that several measures are deteriorating. Cash flow conversion has flattened. 

Investment-grade credit and equity supply have increased. Share buybacks as a percentage of market capitalization have slowed. And capital expenditures as a percentage of operating cash flow for the largest hyperscalers are expected to approach 100% by year end.

“Extreme price action may signal rising instability,” the strategists wrote.

The Recommendation: Stock Picks, Not the Index

Despite the bearish overall message, Bank of America is not telling clients to abandon equities entirely.

The strategists drew a distinction between the cap-weighted index, which they view as overvalued and vulnerable to a correction driven by the concentration of risk in a few mega-cap names, and individual stock selection within the index, where they continue to see opportunities.

“We see opportunity in S&P 500 stocks, but not the overall cap-weighted index,” Subramanian’s team said.

Subramanian has set her year-end S&P 500 target at 7,100, below the approximately 7,400 level where the index was trading Monday, implying roughly 4% downside from current levels if her forecast proves correct. 

That is a relatively modest decline rather than a crash call, but the direction of the signal is meaningfully different from the bullish sentiment that has dominated much of the market narrative in recent months.

A Warning That Fits the Broader Pattern

The Bank of America note arrives at a moment when multiple independent warning signals are converging on the same conclusion.

The Shiller CAPE ratio is at a level tied to September 2000. Market breadth is deteriorating even as headline indexes hit records. AI infrastructure spending is approaching levels that raise questions about returns. Inflation is at a three-year high. 

The Federal Reserve is signaling it may need to raise rates. Consumer sentiment is at a record low. And the Iran war, despite Trump’s repeated claims of an imminent deal, remains unresolved at the 100-day mark.

None of those conditions guarantees a market correction. But collectively they describe an environment where the margin for error is significantly smaller than it appeared at the start of the year.