Bank of America maintains its target of 7,100 points for the S&P 500 by the end of 2026, which implies a 5% decline from current levels. The bank warns that speculation is reaching extreme levels.
The S&P 500 has experienced its best quarter since 2020 and has accumulated a rise of nearly 9% so far this year, but Bank of America (BofA) believes that the rally has a limited lifespan. In a note published this Tuesday, analysts from the American bank reaffirmed their price target of 7,100 points for the index by the end of 2026, which represents a 5% drop compared to last week's close.
Signs of overheating in the market
“Our bearish market signals suggest that speculation is reaching extreme levels as multiple stocks have demonstrably expanded, an event that has historically preceded a 'recovery' in valuations,” warns BofA in its report. The bank points out that S&P 500 companies are generating less free cash flow relative to net income compared to historical trends.
This deterioration is attributed by analysts to the massive spending of so-called hyperscalers on artificial intelligence, which has eroded their profits. At the same time, the Federal Reserve (Fed) continues to struggle against persistent inflation that has been above its 2% target for more than five years. BofA expects the Fed to raise interest rates three times this year in an attempt to control prices.
Rate hikes in a context of high valuations
Historically, the S&P 500 has achieved positive returns during monetary tightening cycles, with stocks peaking between six and twelve months after the first rate hike. However, BofA warns that this time the context is different: the index starts from higher valuations than in any previous cycle, except for 1999-2000, just before the burst of the tech bubble.
Semiconductor stocks, in particular, have experienced astronomical rises driven by the AI boom. Micron Technology, for example, has surged 242% so far in 2026 and 700% year-on-year, even after a recent correction. This behaviour has fueled fears that the euphoria may be nearing its end.
The S&P 500 reached a record high of 7,621 points just a month ago, but since then it has lost about 2% in sharp movements. In other markets, volatility has been even more pronounced: South Korea's Kospi index, dominated by AI heavyweights SK Hynix and Samsung, hit a record weeks ago only to suffer its fifth worst daily drop in history.
Extreme volatility and warnings from other banks
Capital Economics has described these movements as particularly concerning, noting that similar massive sell-offs have only occurred during bear markets such as the Asian financial crisis, the dot-com bubble, and the Great Financial Crisis of 2008. “This volatility is evidence of excessive froth and calls into question the sustainability of this rally,” their analysts state.
Even JPMorgan, which maintains a predominantly bullish outlook, raised its target for the S&P 500 to 7,800 points from 7,600, but accompanied the revision with a warning of a possible “sudden drop.” The bank cites strong earnings estimates as support, although it acknowledges the risks of a violent correction.
For Spanish investors, BofA's warning serves as a reminder that excessive optimism in the stock market often ends in adjustments. Although the US market is not the only one, its behaviour drags European markets along. Experts recommend reviewing portfolios, avoiding oversized positions in technology stocks, and maintaining liquidity to seize potential opportunities if the feared correction occurs. Time will tell whether the 'recovery' anticipated by BofA materialises or whether, on the contrary, the market continues to surprise on the upside.
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