Why These Stock-Market Bears See This Year's Bullish Tailwinds 'Reversing'

• Big Tech's Q1 earnings growth was inflated by one-time investment gains; stripping out gains from Alphabet, Amazon, and Meta reduces S&P 500 profit growth from 27% to 19%
• Big Tech companies are expected to spend heavily on AI infrastructure this year, draining cash that could be used for shareholder returns while limiting their flexibility to cut spending
• BofA sees opportunity in cyclical sectors like energy, materials, and tech hardware, which are growing rapidly from data center spending and historically perform better during rate-hiking cycles

Market Summary: Bank of America Maintains Bearish Outlook on Stocks

Key Position: Bank of America analysts maintained their year-end S&P 500 target at 7,100, implying approximately 5% downside from Monday's close and representing one of Wall Street's most bearish forecasts—nearly 10% below the median of 14 firms tracked by CNBC.

Main Thesis: BofA argues that key market tailwinds from recent years—strong earnings, ample free cash flows, and high liquidity—"are reversing." The firm challenges the prevailing bullish consensus for the second half of 2026.

Big Tech Concerns

• First-quarter S&P 500 earnings growth appears artificially inflated; stripping out one-time gains from Alphabet, Amazon, and Meta reduces profit growth from 27% to 19%
• Major tech companies (Microsoft, Amazon, Meta, Oracle) face massive capital expenditure commitments this year for AI infrastructure
• These companies "can't cut capex without dropping out of the AI race," limiting financial flexibility and reducing funds available for shareholder returns

Economic Headwinds

• Inflation surged last month to concerning levels
• Labor market showing signs of weakness
• BofA economists now expect the Federal Reserve to raise rates by 75 basis points this year
• Current S&P 500 valuations are more expensive than at the start of most previous hiking cycles, except 1999's dot-com bubble

Investment Opportunity: Despite overall bearishness, BofA sees opportunity in cyclical sectors including energy, materials, and tech hardware. These sectors benefit from data center spending boom and historically perform better during rate-hiking cycles, yet their stocks don't reflect current growth prospects.

Market Context: The S&P 500 was up approximately 9% year-to-date through the article date, following a double-digit second-quarter advance.