Why 7 of Bank of America's 10 Bear-Market Signposts Are Flashing Red

The headline number first: 7 of 10 lights are red

Bank of America just told its own clients, in effect, to stop buying stocks here. The first thing that jumped out at me reading the report was a single number: of the 10 "bear-market signposts" BofA has refined over many years, seven are now flashing red.

A bear market is nothing exotic — it's a big, lasting drop of 20% or more from the highs. A signpost is a warning light that history says tends to appear before such a drop. Think of your car's dashboard. One warning light coming on is no big deal; you can probably keep driving. But when light after light starts to glow, it's time to pull over and check.

What scares me more is the speed

The number 7 matters less than how fast they lit up. Five turned red by April, then two more flipped in May. Not slowly, one at a time — they came on in quick succession.

In plain language, these signals track things like:

• How confident ordinary people feel about the economy
• How much investors expect stocks to keep rising — because when everyone is sure stocks only go up, that's usually exactly when they don't
• Stress in the credit system — are people and companies struggling to borrow and repay, are banks getting nervous about lending
• Whether banks are quietly increasing their reserves for loan losses

If you're a value investor, watch this one light

The signal I care about most is a different one. BofA found that the most expensive stocks — the ones priced highest relative to what they actually earn — have been beating cheaper stocks by a massive margin. In their words, a sign of "excessive speculation."

Speculation is just gambling: buying because the price is rising and hoping it keeps rising. When the most expensive, most hyped names fly the highest, it means people have stopped asking what a business is actually worth. They're just chasing. Historically, that has not ended well.

Expensive on 17 of 20 yardsticks

BofA measured how pricey the market is using 20 different yardsticks. The result: the market is expensive on 17 of 20, and on 8 of them stocks are even pricier than during the 2000 dot-com bubble.

If you were around for that one, you know how it ended: 12 flat years for the S&P 500, 16 flat years for the Nasdaq — and inside that, an 80% drop in three years.

The gap inside tech is unsettling too. Between the best and worst names — Apple, Nvidia, Broadcom at the top — the spread is the widest since February 2000. The dot-com peak was March 2000, so this is the widest margin in over 26 years. When some stocks rocket while others sink that hard at the same time, BofA calls it a sign of rising instability.

For balance: three lights are still green

To be fair, three of the 10 are still green, and BofA was honest that today's big tech is far healthier than the dot-coms of 2000 — real businesses making real money, not profitless websites.

But here's the part I really want you to hear: even on the lights that are still green, the numbers are getting worse. The cash flow these tech giants generate has flatlined or fallen. They're spending nearly every dollar they make building out AI — by year-end the biggest names are expected to spend over 100% of their cash flow on it — and they're buying back fewer of their own shares. Those green lights aren't bright green. They're turning yellow, inching toward red.

Where BofA lands — and where I agree

BofA cut its S&P 500 target to 7,100, below where the market is currently trading. In other words, the index as a whole may have less room to run.

But they did not say sell everything and run. Their exact message: they see opportunity in individual S&P 500 stocks, just not in the overall index as one big basket. The average company may struggle; a good individual business at the right price can still do very well.

The article's headline urged readers to "take profits." I'm skeptical of hopping in and out of individual stocks based on market timing. If you bought a great company at a good price — or you're dollar-cost-averaging low-cost ETFs — riding it out usually beats trading the headlines. Read this alongside the 40% recession warning and the picture sharpens.

FAQ

Q: If 7 signposts are red, does a crash happen right now? A: No. These are warnings that the environment is getting risky, not timing tools. Nobody knows when — or in what form (a crash, or years of going sideways) — a big drop arrives.

Q: So should I sell all my stocks? A: Even BofA didn't say that. The point is to be cautious on the index as a whole while staying open to good individual businesses at fair prices.