Bank of America strategists are declaring 2026 the start of a distinct market phase in which corporate profits are climbing even as market valuations contract. In a note led by equity strategist Savita Subramanian, the bank said "the year of higher EPS, lower PE has officially begun," pointing to a combination of upward earnings revisions and multiple compression.
The strategists highlight that, despite what may look like a return to prior index levels for the S&P 500, price-to-earnings ratios have tightened by more than 10% since 2025. The bank continues to work from a year-end S&P 500 target of 7,100 and expects earnings per share to rise by 13% over the year - a dynamic that implies further downside for aggregate P/E ratios if indexes remain near current levels.
Drivers behind de-rating
BofA identifies several forces behind the multiple compression. The firm points to a combination of increasing capital intensity and leverage in the Technology, Media and Telecoms complex, which it views as a primary justification for the sharpest valuation declines in that group. The bank also notes a pullback in buyback activity, a less dovish stance from central banks, and inflation as additional contributors to de-rating.
The strategists caution that large technology initial public offerings and delayed effects from an oil price shock remain potential sources of future market impact, though they do not present these as imminent facts - rather as elements still on the horizon.
Sector positioning and stock selection
On sector advice, BofA flags Industrials as particularly risky on valuation grounds, calling the sector "more expensive than ever" and noting that investor exposure is at peak levels. The bank warns that Industrials have effectively become a composite play - a backdoor exposure to oil, defense and artificial intelligence - which may account for stretched prices.
Conversely, the bank prefers Staples and is underweight Discretionary, citing the possibility of consumer trade-down behavior if AI-related displacement affects professional services jobs. Within Financials and Technology, BofA suggests there remain attractive opportunities at the individual stock level despite broad-based selling across those sectors. In Health Care, the firm highlights declining R&D spending as a factor that could support a lower long-term multiple.
Implications for investors
BofA's framework implies a market environment where rising earnings will no longer reliably translate into higher index prices because valuation multiples are contracting. That combination shifts emphasis toward sector selection and company-level fundamentals, particularly around capital intensity, leverage, buyback policy and R&D investment.