Bank of America says the S&P 500 remains expensive in 18 out of 20 valuation metrics

LootboxPhobia · 2026-02-20T14:24:01+00:00

The latest report from Bank of America indicates that the S&P 500 Index is overvalued across multiple valuation metrics, with expected P/E ratios facing compression, especially against the backdrop of poor performance in the software sector. The bank maintains a conservative target level for 2026, emphasizing that fundamental factors will drive P/E ratios lower.

LootboxPhobia

2026-02-20 14:24:01

Abstract generation in progress

Investing.com - The latest valuation assessment report released by Bank of America shows that despite recent market volatility, the overall valuation of the S&P 500 remains relatively high.

Access analyst-driven in-depth data through InvestingPro

In a research report on Friday, analyst Savita Subramanian wrote that the index “is expensive in 18 out of 20 valuation metrics; four of which are near historical highs,” further explaining why Bank of America continues to expect profit-driven P/E compression.

Bank of America maintains one of the lowest target points on Wall Street for the end of 2026 at 7,100 points, but Subramanian emphasized that the bank’s earnings forecast “is at the high end of the range (+14%), which means P/E ratios will be significantly compressed.”

She added that this judgment “is not based on valuation mean reversion,” but rather on “convincing fundamentals and macro factors that will drive P/E ratios further down—even in the technology sector.”

Bank of America states that the software sector is viewed as a newly defined value sector with strong performance.

Subramanian pointed out that the software sector is “the worst-performing industry in 2026,” down 20% year-to-date, with valuations at a decade low due to concerns related to artificial intelligence.

The trading price of this sector is “about 20% below its long-term average,” although it still carries a slight premium relative to the index. Bank of America warns not to expect a rapid rebound in valuations for the software sector or the S&P 500.

Bank of America listed five main drivers behind the decline in P/E ratios, including the “disruptive math effect,” where falling prices typically lead to downward revisions of earnings expectations, and the upcoming “oversupply of issuance,” as large IPOs may increase stock supply.

The bank also cited historical data indicating that in years of strong EPS growth, “the probability of P/E compression is 66%.” Factors such as rising asset intensity, increased leverage, and potential “index risks from private market volatility” all point toward further valuation declines.

View Original

This page may contain third-party content, which is provided for information purposes only (not representations/warranties) and should not be considered as an endorsement of its views by Gate, nor as financial or professional advice. See Disclaimer for details.

1 Likes