BofA Sees New Phase: Profit Growth, Valuation Pressure

Key Moments

Market Regime Shift: Rising EPS, Falling Multiples

Bank of America strategists argue that equity markets have entered a new phase in 2026, marked by improving corporate earnings but declining valuations. In a note led by equity strategist Savita Subramanian, the team wrote that “the year of higher EPS, lower PE has officially begun,” signaling what they see as a clear break in market dynamics.

The strategists pointed out that, even though the S&P 500 has effectively performed a round-trip in index levels, there has been more than 10% compression in the price-to-earnings ratio since 2025. They attribute this to substantial positive revisions in earnings rather than a broad-based increase in index prices.

Outlook for the S&P 500 and Valuation Implications

Bank of America reiterated its year-end target for the S&P 500 at 7,100. This target is paired with an expected 13% growth in earnings per share, a combination that, according to the bank, implies there is still room for valuations to decline further.

Sector-Level Valuation Pressures

The strategists highlighted Technology, media and telecoms as the areas where valuation multiples have contracted the most. Bank of America views this pronounced de-rating as warranted, pointing to increased capital intensity and higher leverage across these industries.

Additional forces that the team believes are weighing on valuations include a slowdown in share repurchase activity, a less dovish stance from central banks, and ongoing inflation. They also noted that large Technology initial public offerings and the delayed effects of past oil price shocks remain ahead and could further influence market pricing.

Sector Positioning and Strategy

On sector allocation, Bank of America advised investors to be wary of Industrials. The strategists characterized this group as “more expensive than ever” with buy-side positioning at a peak, arguing that the sector now effectively serves as a composite exposure to oil, defense, and AI themes.

The bank continues to favor Consumer Staples while maintaining an underweight stance on Consumer Discretionary. This view is linked to expectations that consumers may trade down in their spending patterns if professional services roles come under pressure from AI-driven disruption.

In Financials and Technology, Bank of America sees attractive opportunities for selective stock picking, despite what it describes as recent broad-based selling across these sectors. At the same time, the strategists pointed to declining research and development spending in Health Care, suggesting this trend could warrant a lower long-term valuation multiple for the sector.