Bank of America's recent valuation review concludes that the S&P 500 remains broadly expensive despite recent bouts of market volatility. In a note issued on Friday, analyst Savita Subramanian wrote that the index "is statistically expensive on 18 of 20 valuation metrics; four are near record highs," reinforcing the bank's view that earnings-driven multiple compression is likely.
BofA continues to project one of the more conservative year-end targets on Wall Street for the benchmark, setting its 2026 target at 7,100. Subramanian emphasized, however, that the bank's earnings forecast is relatively optimistic within the consensus range - a projected increase of 14% - which implies substantial compression in price-to-earnings multiples if the target is to be met.
The call for lower multiples is not framed as a simple return to historical valuation averages. Subramanian stressed the bank's stance is "not based on valuation mean reversion" but rather on what BofA describes as "compelling fundamental and macro reasons for PEs to compress further - even in Tech."
Within the market, BofA highlights Software as a notable case. The bank characterizes the group as a newly defined value sector, pointing out that Software has been the worst performing industry in 2026 so far, down 20% year-to-date, and that valuations sit at decade lows amid concerns related to artificial intelligence. While Software now trades about 20% below its long-term average, it still carries a small premium relative to the broader index. BofA cautioned against expecting a rapid rebound in valuations for either Software or the S&P 500.
To explain the outlook for lower price-to-earnings ratios, BofA laid out five drivers. Among them is what the bank calls "disruption math," where falling prices typically lead to earnings downgrades. Another key element is a prospective "glut of issuance" - the potential for mega-initial public offerings to expand the supply of equity.
Historical patterns also factor into the bank's assessment: BofA notes that during strong earnings-per-share years, PE multiple compression occurred 66% of the time. Additional pressures cited include rising asset intensity, higher leverage, and a possible "index risk from private hiccups," each presented as contributors to further valuation downside.
Implications
- Valuation pressure may be broad-based across the S&P 500, with Technology and Software specifically highlighted.
- BofA's scenario relies on earnings growth assumptions that imply significant PE compression to reach its 7,100 year-end 2026 target.
- Equity issuance dynamics and potential earnings downgrades are central to the bank's forecast for lower multiples.