BofA highlights five "mounting risks" that could be facing the S&P 500

Investing.com - The valuation floor for the benchmark S&P 500 is likely lower than current levels, analysts at BofA have flagged, adding that risks of correction in a recent rally in U.S. stocks are "mounting."

In a note to clients, the BofA strategists including Savita Subramanian said equities are beginning to shift from "frothy to bubbly." They highlighted that, of thee 20 valuation metrics they measure, five -- the S&P 500’s market cap to GDP, price to book, price to operating cash flow and enterprise value to sales -- have hit new records.

Four others -- price to unadjusted earnings per share; median price-to-earnings; enterprise value divided by earnings Before interest, taxes, depreciation, and amortization; the S&P versus U.S. West Texas Intermediate crude oil prices; and the S&P versus the small-cap Russell 2000 -- have also eclipsed the metrics in March 2000. The dot-com bubble, a stock market boom during the late 1990s, peaked during that month.

Meanwhile, the analysts warned that "60%" of the signposts of a bear market, incluidng high price-to-earnings, expensive versus cheap stock performance and credit indicators, have been triggered over the last few months.

Long-time drivers of earnings, namely artificial intelligence and U.S. consumer resilience, "may be at odds," they wrote.

"AI may reduce demand for professional services, whose workers contributed most to consumption growth since the 1980s," the analysts said.

At the same time, a "new cast of credit creation characters" have come to the fore, following the supplanting of big banks by private lending in the wake of the late-2000s financial crisis, the analysts said.

A fog has also formed the outlook for sweeping U.S. tariffs, while a federal government shutdown has led to a delay in official data has muddied the trajectory for the wider economy, they added.

"Canaries and cockroaches" may be hiding in the latest quarterly earnings season as well, they warned.

"Industrial bellwethers had mixed results, but the net message was macro uncertainty, no expectations for a benefit from unlocked demand this year. Banks had good results, were cautiously optimistic, but recent credit events suggested ’probably more’ cockroaches to come," the analysts said.

Against this backdrop, they suggested that investors "be selective."