BofA Issues Hawkish Warning to Wall Street... "S&P 500 to Retreat to 7,100 in H2"

▲ S&P 500, US Stock Market/AI Generated Image

While Wall Street is calling for further gains in the S&P 500 index, Bank of America (BofA) has issued the opposite warning. The artificial intelligence (AI) investment frenzy and record growth expectations are turning into signs of overheating, with the S&P 500 index potentially dropping to 7,100 in the second half of this year.

According to Barron's, a US economic media outlet, on July 6 (local time), Savita Subramanian, Head of US Equity & Quant Strategy at Bank of America, maintained her S&P 500 Index (SPX) target at 7,100. Subramanian maintained a neutral to negative outlook on the overall index, identifying mega-cap tech stocks as a key risk.

Subramanian stated, “It’s difficult to find reasons to continue buying the Magnificent Seven or mega-cap tech stocks that are making AI capital expenditures.” She pointed out that if the pace of AI investment slows, the market's core growth logic could be shaken, and it needs to be confirmed whether companies bearing massive infrastructure construction costs can achieve long-term investment results. She also cited the example of the past telecom bubble, where companies built the infrastructure used today, but many disappeared before enjoying the benefits.

She also warned of the impact AI could have on the US consumer economy. Subramanian explained that in a situation where 70% of the US economy is consumption-driven, companies are investing funds in AI instead of human resources, and new hiring of office-based professional service personnel, including college graduates, is already slowing down. With even middle-class consumers showing signs of reducing their spending, risks are accumulating on the core axis of US consumption growth, according to the analysis.

Signs of overheating within the stock market were also detected. Subramanian pointed out that long-term growth expectations for the S&P 500 index, particularly in the technology and communication services sectors, are approaching their highest levels since the 1980s, and the surge in stocks with high valuations and high growth expectations could be driven more by speculative sentiment and FOMO (Fear Of Missing Out) than by fundamentals. The supply and demand environment, which has supported the stock market for the past two years, is also moving in the opposite direction due to an increase in initial public offerings (IPOs) and new stock issuances.

Subramanian emphasized large-cap value stocks over mega-cap tech stocks. She highlighted that sectors such as energy, finance, and manufacturing have relatively robust dividend and share buyback trends, and investors should focus on companies that generate cash rather than consume it. She also warned that if long-term interest rates once again move out of control amidst the US fiscal deficit and weakening demand for Treasury bonds, it could trigger a broad stock market sell-off.

[Key Article Summary]

-Bank of America, which maintained its S&P 500 index target at 7,100, warned of a risk of the index falling in the second half of this year.

-Overheating AI investment, slowdown in office worker hiring, weakening middle-class consumption, and growth expectations approaching the highest levels since the 1980s were identified as risk signals.

-Bank of America favored large-cap value stocks, including energy, finance, and manufacturing, and cash-generating companies over mega-cap tech stocks.

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