Bank of America told investors to “take profits” on June 5, and many of them did.
Savita Subramanian’s strategy team flagged seven of the firm’s 10 bear-market signposts—five already triggered by April, plus two more in May—and told clients to trim their winners. The firm sees the S&P 500 ending the year at 7,100, below where it trades now (at time of writing, 7,367).
That note now makes Subramanian look like Nostradamus. The S&P 500 had set a record on June 1, four sessions before she published. By Wednesday’s close it was down about 4.5%, to 7,267. The Nasdaq had fallen roughly 7% from its own June 1 peak; the Dow about 2.7%, or some 1,400 points.
Many of the funds that suffered the worst routs were the most leveraged. The Direxion Daily Semiconductor Bull 3X fund returned 75.9% in May and still bled $4.1 billion that month—a second straight month of outflows as traders cashed out of the year’s defining rally.
The Philadelphia Semiconductor Index fell 10.3% on June 5–its worst day since 2020–after Broadcom’s cautious guidance and a memory glut handed the crowd a reason to sell. More than $1 trillion in market value evaporated in a single session. Micron, which sits at the center of the memory story, was hit hardest. A Monday bounce faded by Tuesday. By Wednesday the indexes were lower again, until rebounding on Thursday on stabilizing news in Iran.
Underneath the headline indexes, the rotation is clear: out of the high-beta tech winners and into the boring stuff. Stocks fell Wednesday, but most of them rose—nearly 63% of issues advanced even as the Dow shed 950 points. The spread between the best- and worst-performing tech stocks is the widest since February 2000, Subramanian said.
What were the signs?
BofA tracks 10 conditions that tend to all trigger before an S&P 500 peak, sorted by sentiment, valuation, and macroeconomic.
Both valuation signals were lit. The first is the Rule of 20: Add the market’s price-to-earnings ratio to the inflation rate, and if the sum is above 20, that means stocks are expensive. The logic is that inflation makes future earnings worth less, so it should buy a lower multiple. Today the market pairs with a trailing p/e ratio of above 30 with inflation over 4%, and the total sits well above 20.
The second signal tracks the gap between the priciest stocks and the cheapest. That gap has stretched to an extreme BofA reads as speculation; investors paying almost any price for the winners, like the semiconductor or memory sectors, as they did in 1999 and 2021. By a broader measure, the index is expensive on 17 of 20 metrics, eight of them richer than the dot-com peak.
