S&P 500 just wrapped up its best quarter since 2020, and it`s up around 9% for the year. But before you get too comfortable, Bank of America has some news that might rain on your parade: they think stocks are headed lower from here.
BofA Says We`re Due for a Pullback
Bank of America is sticking with its year-end target for the S&P 500 of 7,100. That might not sound too dramatic until you realize it`s actually about 5% below where the market closed last week. So BofA is practically saying "get
ready for stocks to actually drop."
Why do they think this? There are a couple of reasons that stand out.
- First, they`re seeing warning signs that speculation has gotten out of hand. Bunch of high priced, hyped-up stocks have jumped up really fast, and that kind of jump tends to get followed by a "snapback", basically prices come crashing back down to more reasonable levels.
- Second, companies aren`t generating as much actual cash relative to their profits as they usually do. A big reason for that is the AI boom. Tech giants are spending massive amounts of money building out AI infrastructure, and all that spending is eating into their free cash flow, even while their earnings look fine on paper.
Also Fed Might Make Things Worse
On top of all that, the Federal Reserve is dealing with inflation that just won`t quit. It`s been running above the Fed`s 2% target for more than five years now, and BofA thinks the Fed has finally lost patience. Their prediction is three rate hikes this year to try to get inflation under control.
Normally, rate hikes aren`t necessarily a death sentence for stocks, but the market has kept climbing for six to twelve months after the first hike in a cycle before topping out. But BofA points out something that makes this time feel different: stocks are more expensive right now, heading into a potential rate hike, than in any similar period except right before the dot-com crash in 1999-2000. That`s not exactly a comforting comparison.
Chip Stocks Are Going Absolutely Wild
Nowhere is this more obvious than in chip stocks, which have been on an insane run thanks to the AI boom. Take Micron, for example, it`s up 242% just this year, and a huge 700% over the past twelve months. That`s even after a recent pullback.
Numbers like that tend to make people nervous, and for good reason. The S&P 500 hit an all-time high just a month ago, but since then it`s been swinging wildly, dropping around 2% along the way.
It`s not just in the U.S., South Korea`s stock market, which is heavily influenced by AI-chip giants like SK Hynix and Samsung, hit a record high recently then a few days later suffered one of the worst single-day crashes in its history.
Some Analysts Are Genuinely Worried
Capital Economics is flagging these wild price swings as a red flag. They point out that this kind of extreme volatility has historically only shown up during actual bear markets: Asian financial crisis, the dot-com bust, and the 2008 financial crisis. Their take is pretty blunt: this level of choppiness suggests there`s a lot of excess froth in the market right now, and it makes them question whether this rally can keep going.
Even JPMorgan, which is mostly optimistic, had a warning about a possible "flash crash." That said, they actually raised their year-end target for the S&P 500 to 7,800 (up from 7,600), based on strong earnings expectations. Their assumption is that the Fed holds rates steady this year before hiking next year, and that AI stocks continue to be the main driver of gains. But they`re also flagging some real risks: tougher comparisons for earnings season, a lot of money crowded into risky, lower-quality growth stocks, more stock supply hitting the market, and the chance that tighter Fed policy could cap how high valuations can climb.
Not Everyone`s Worried, Though
Then there`s Ed Yardeni, who`s been predicting a new "Roaring Twenties" for stocks since the decade started. He`s actually gotten more bullish, bumping his year-end S&P 500 target up to 8,250 from 7,700 back in May. His reasoning comes down to corporate earnings, which he thinks are strong and will stay that way.
He`s also pushing back hard on comparisons to the dot-com bubble. His argument is that the late-90s boom was driven by FOMO as investors piled into tech stocks based on hype and future promises. This time around, he says, it`s different: he`s calling it "FEMO," or fear of missing out on fabulous earnings momentum. In his view, actual profits are driving this rally, not just excitement.
So... What Should You Take From This?
BofA worried about cash. AI spending is eating into free cash flow even as reported earnings stay strong.
JPMorgan worried that too much money crowded into a few speculative stocks, more shares coming to market, and a Fed that could still tighten.
Yardeni is betting the earnings are real and durable.
Is Big Tech`s AI spending going to show up as real profit growth soon, or is it going to keep eating into cash flow without a payoff?
Watch earnings reports and cash flow numbers from the hyperscalers over the next couple of quarters.
