BofA flags thinner S&P 500 returns into 2026 as valuation pressure builds and AI optimism cools
Bank of America expects the S&P 500 to deliver only modest upside through 2026, arguing stretched valuations will compress even as profits grow. The bank sees leadership rotating toward capex-heavy and defensive pockets, and warns that AI monetization and power constraints could temper one of the market’s biggest narratives.
Key Points
- BofA projects the S&P 500 at roughly 7,100 by 2026, about a 5% gain, with a wide 5,500–8,500 trading range.
- Valuation compression is expected despite ~14% earnings growth, as liquidity support fades.
- Drivers of thinner liquidity: softer buybacks, heavier corporate capex, and limited room for further central bank easing.
- Sector tilt shifts toward capex-led and “blue-collar” themes; Staples upgraded to Overweight, Consumer Discretionary cut.
- AI faces slower monetization and near-term power-supply constraints, moderating upside expectations.
What BofA is projecting
BofA has turned more guarded on U.S. equities, calling for the S&P 500 to reach around 7,100 by 2026—roughly a 5% rise from current levels—despite forecasting double-digit earnings growth of about 14%. The bank frames the outlook within a broad trading corridor of 5,500 to 8,500, underscoring elevated uncertainty and the likelihood of pronounced swings around macro data, policy expectations, and positioning.
Why valuation multiples could compress
The bank sees a fading liquidity backdrop as a key headwind to multiples. Corporate buybacks have softened, companies are prioritizing capital expenditure over financial engineering, and policymakers have less scope for additional easing. In that setting, even solid profit growth may not translate into outsized equity gains if real rates remain firm and the equity risk premium fails to expand.
Sector rotation: capex and defensives over consumers
BofA expects market leadership to migrate toward capex-driven industries and “blue-collar” themes while reducing exposure to consumption-heavy, white-collar-sensitive areas. In a notable sector move, the bank upgraded Staples to Overweight and cut Consumer Discretionary, signaling a preference for defensive cash flows and pricing power as late-cycle dynamics take hold.
AI tailwinds cool as power bottlenecks loom
While AI remains a structural growth story, BofA warns that near-term monetization could prove slower than hoped. Surging power needs and grid constraints risk delaying deployment and profitability timelines. That could cap upside for the AI complex and elevate dispersion within tech as investors reassess which business models capture durable returns versus those dependent on cheap capital and unconstrained infrastructure.
Rates, FX and cross-asset takeaways
A backdrop of slower multiple expansion and more selective leadership typically tightens financial conditions at the margin. If U.S. growth remains resilient but the equity impulse cools, the dollar could stay supported on rate differentials, while risk-off episodes may intermittently benefit the yen and Swiss franc. In credit and vol, thinner liquidity and a wider index range argue for nimble hedging and an emphasis on quality balance sheets, cash generation, and pricing power—consistent with BofA’s tilt toward defensives. As always, execution will hinge on the path of inflation, real yields, and policy signaling into 2026, BPayNews notes.
FAQ
What is BofA’s S&P 500 target and time frame?
The bank pegs the S&P 500 at around 7,100 by 2026, implying roughly a 5% gain over the period.
Why does BofA expect valuation compression?
Even with ~14% earnings growth, BofA sees less liquidity support from softer buybacks, heavier capex, and limited scope for additional central bank easing—factors that can cap multiples.
Which sectors does BofA favor and which does it reduce?
BofA favors capex-led and defensive areas, upgrading Staples to Overweight, while cutting Consumer Discretionary given consumption headwinds and late-cycle dynamics.
What risks does BofA highlight for the AI trade?
Slower-than-expected monetization and surging power requirements that strain infrastructure, potentially delaying deployment and profits.
What trading range does BofA see for the S&P 500?
A wide 5,500–8,500 band, reflecting high uncertainty and potential for larger swings around macro and policy catalysts.
How could this outlook affect FX and rates?
If equity multiples compress while U.S. growth and rates remain relatively firm, the dollar could stay supported. Periodic risk-off episodes may aid haven currencies like JPY and CHF, while higher real yields and tighter financial conditions would keep investors selective across risk assets.
