Bank of America is seeing fewer warning signs for a major U.S. stock-market downturn, but the firm is still far from bullish on the S&P 500. Strategists led by Savita Subramanian say valuations have improved as earnings growth outpaces stock gains, yet their long-term model still points to potentially negative returns from today's levels.

The S&P 500's forward price-to-earnings ratio has fallen to about 20 times from 22 times at the start of 2026. BofA said that compression happened for a good reason, as next-12-month earnings per share have climbed more than 20%, well ahead of the index's roughly 12% year-to-date gain.

Technology and energy have seen some of the largest declines in forward valuation multiples despite strong earnings growth, suggesting portions of the market have become cheaper without a corresponding collapse in fundamentals.

But BofA's longer-term outlook remains cautious.

Using its normalized trailing P/E framework, the bank estimates the capitalization-weighted S&P 500 could produce annualized returns of about -3% over the next decade. By comparison, the equal-weighted index carries an estimated +3% annualized return, highlighting BofA's concern that valuations remain particularly stretched among the market's biggest companies.

The bank also said earnings transparency and corporate leverage have deteriorated from good to less good.

There is better news on near-term bear-market risk. In May, 70% of BofA's proprietary bear-market signposts were triggered, putting markets in red flag territory. That reading has since fallen to 60%, helped by improving bank lending conditions.

Investor Takeaway

For investors, the decline in bear-market signals lowers immediate downside risk, but it does not erase BofA's valuation concern.

The most important numbers to watch are earnings growth, forward valuations, credit conditions and market breadth. If earnings continue rising faster than prices, valuations could become more attractive without requiring a major correction.

But history argues for restraint: when 60% of BofA's bear-market indicators are triggered, the median subsequent 12-month return is only about 3%. The stronger long-term outlook for the equal-weighted S&P 500 also suggests investors may increasingly need broader market participation, rather than continued reliance on mega-cap leadership, to generate attractive returns.