No Sign of Bubble Forming for BofA: ‘This Bull Market Has Legs’

Bank of America Corp. sees little evidence to support the worriers on Wall Street who say the stock market has risen too far, too fast and is approaching bubble territory.

The rally in US equities that began last year, as sharp as it has been, doesn’t reflect conditions seen in prior boom-and-bust cycles, such as big gaps between share prices and their values, or the significant use of leverage, according to the bank’s strategists led by Savita Subramanian.

The S&P 500 Index edged lower Monday, extending last week’s decline, with traders on alert for a key inflation reading Tuesday. The market will focus on whether consumer-price pressure remains stubbornly sticky, which could push bets on Federal Reserve interest-rate cuts deeper into 2024. That scenario may add to concern that US stocks are looking stretched after the benchmark gained in 16 of the past 19 weeks, setting a series of record highs.

Still, Subramanian points to strong earnings and a resilient economy and sees more room for gains. She lifted her S&P 500 year-end target to 5,400 last week, among the highest on Wall Street, implying more than 5% upside from current levels.

“Sentiment has warmed up on equities since mid-2023, driving our slightly lower level of conviction in an up market, but is nowhere near bullish levels of prior market peaks,” the firm’s head of US equity and quantitative strategy wrote. “In our view, this bull market has legs.”

Despite anecdotal concern that investor optimism has become excessive, sentiment remains in “neutral territory” like in 1995 when the dot-com bubble was expanding, and not “wildly bullish” as in 1999 when it was closer to bursting, based on BofA’s Sell-Side Indicator.

Bull markets end in widespread euphoria, according to Subramanian, who says the fervor at this stage is “ring-fenced” to certain themes, like artificial intelligence and GLP-1 obesity drugs.

A growing number of strategists have downplayed concern around a bubble.

JPMorgan Chase & Co.’s Mislav Matejka said in a note distributed Monday that valuations of the seven technology behemoths that have powered the rally are below their five-year average relative to the rest of the S&P 500. Meanwhile, Goldman Sachs Group Inc. strategists said last week that while the market’s concentration is the highest in decades, the top names trade at significantly lower valuations than their counterparts at the peak of the tech bubble.

As Subramanian sees it, while snapshots of price-to-earnings multiples reflect a disconnect between price and value, the S&P 500 excluding the so-called Magnificent Seven megacap tech stocks trades closer to its long-term average.

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