\n
![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2024\/06\/GettyImages-2157295901-e1718635696908.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
Stocks have surged to record highs this year on the back of an unexpectedly resilient<\/a> U.S. economy and a euphoric<\/a> AI boom. Defying Wall Street\u2019s already buoyant\u2014and still rising<\/a>\u2014forecasts, the S&P 500 has soared more than 15% year to date, while the tech-heavy Nasdaq<\/a> has spiked roughly 20% as big tech continues to get bigger.<\/p>\n Analysts are scrambling to keep up with the market, with a top bear even turning bullish<\/a>. But while this epic first-half market surge and increasingly lofty valuations have led some to fear a correction<\/a> could be on the way, Bank of America<\/a> doesn\u2019t yet see enough of the 10 classic signs of a bull market peak.<\/p>\n \u201cWe have seen a surge in requests over recent weeks for bull market signposts, the triggers that typically precede an S&P 500 peak\u2026The good news? Today 40% have been triggered versus an average of 70% ahead of prior bull market peaks,\u201d Savita Subramanian, Bank of America\u2019s head of U.S. equity and quantitative strategy, wrote in a Friday note.\u00a0<\/p>\n She noted that her 10 signposts\u2014which include measures of consumer confidence, credit stress, earnings growth, and more\u2014aren\u2019t the \u201choly grail\u201d for predicting stock market peaks. But when enough of them are triggered, it signals increased risk for investors.\u00a0<\/p>\n For now, though, with just four out of 10 signposts flashing warning signs, Subramanian recommended investors avoid panic selling. She also noted that many of the classic bull market peak indicators that other strategists use \u201csound worrisome but have little information content.\u201d<\/p>\n The veteran strategist went on to caution that attempting to time market entries and exits in order to avoid short-term losses is typically a fools\u2019 errand. \u201cRemaining invested is generally superior to emotional selling,\u201d she said. \u201cFor the S&P 500, time is literally on your side: the probability of loss in the index over a 1-day period is roughly equivalent to a coin flip, but drops precipitously as time horizons extend.\u201d<\/p>\n Keeping those words of warning in mind, it may still pay to track Subramanian\u2019s 10 bull market peak signposts, particularly for more active investors. Here\u2019s what the strategy guru monitors when she\u2019s looking for signs of a market correction.<\/p>\n Consumers\u2019 mood tends to improve before bull stock market peaks. The Conference Board\u2019s Consumer Confidence Survey<\/a> typically hits 110 or higher within six months of a market peak, before falling alongside stock prices, according to Bank of America. This indicator was triggered in January, when it hit 111.<\/p>\n Despite U.S. stocks\u2019 impressive history of gains, consumers\u2019 forecasts for stock market returns are typically quite low. When that changes, it can signal a market peak. Historically, when the Conference Board\u2019s survey shows the net percentage of consumer bullishness on stocks tops 20%, a market peak occurs within six months. This indicator was triggered in the spring; a net 23% of consumers are now bullish.<\/p>\n Paradoxically, when Wall Street analysts are extremely bullish, that can be bad news for stocks. In half of the last six bear markets, BofA\u2019s Sell-Side Indicator\u2014which tracks analysts\u2019 average recommended portfolio allocation to stocks\u2014has flashed a \u201csell\u201d signal within six months of the market\u2019s peak. The indicator is currently in \u201cneutral\u201d territory.<\/p>\n When analysts\u2019 long-term growth views for the S&P 500 are more than one standard deviation above the five-year average, it can signal a market peak is on the way. \u201cWhen expectations are high, stocks are more likely to disappoint,\u201d Subramanian noted.<\/p>\n When M&As rise one standard deviation above the 10-year average, it may signal confidence and a late-cycle stretch for growth opportunities, Subramanian explained. M&A activity soared prior to the 1990\u2019s dot-com bubble, the Global Financial Crisis, and even 2022\u2019s bear market. It\u2019s rising again today, but still well below the threshold that would trigger Subramanian\u2019s indicator.\u00a0<\/p>\n A high price-to-earnings (PE) ratio\u2014a common metric used to value stocks\u2014coupled with high inflation is a bad sign for markets.\u00a0 When the sum of the S&P 500\u2019s trailing PE ratio and the annual consumer inflation rate reaches one standard deviation above its 10 year-average sum, it has signaled a market peak 66% of the time since 1990. It\u2019s currently 0.9 standard deviations above the average.<\/p>\n Stocks with low PE ratios (cheap) tend to outperform those with higher PE ratios, but that changes before stock market peaks. Low PE stocks have underperformed high PE stocks by at least 2.5 percentage points in the six months before five of the last seven market peaks. Even with value stocks underperforming growth stocks this year, however, this indicator hasn\u2019t been triggered.<\/p>\n When long-term U.S. Treasury yields drop below short-term U.S. Treasury yields, it can signal weakening economic growth expectations and even a market peak. This dynamic, called an inverted yield curve, has happened before five out of the last eight bear markets. The yield curve has been inverted since July 2022 in the longest inversion in history.<\/p>\n Bank of America\u2019s credit stress indicator measures credit access, leverage, distress loans, and more to determine the health of the consumer and forecast stock market peaks. It has dipped below 0.25 within six months of three of the last five bull market peaks, but currently sits at 0.39.<\/p>\n Banks tend to make loans more difficult to get prior to stock market peaks; this is known as tightening credit conditions. Bank of America looks at the Senior Loan Officer Opinion Survey to measure credit conditions, and with a net 16% of banks tightening commercial and industrial loans to large companies, the indicator is flashing a warning sign.<\/p>\n<\/div>\n\nThe 10 signs of a bull market peak<\/h2>\n
1. Consumer confidence (Triggered)<\/h3>\n
2. Consumers turning bullish on stocks (Triggered)<\/h3>\n
3. Sell\u2013<\/strong>Side <\/strong>Indicator<\/h3>\n
4. Long-term growth expectations<\/strong><\/h3>\n
5. Elevated mergers and acquisitions activity<\/h3>\n
6. Valuations <\/strong>plus inflation<\/strong><\/h3>\n
7. Performance of \u2018expensive\u2019 vs. \u2018cheap\u2019 stocks<\/strong><\/h3>\n
8. The yield <\/strong>curve (Triggered)<\/strong><\/h3>\n
9. Credit Stress Indicator<\/strong><\/h3>\n
10. Credit conditions: Senior Loan Officer Opinion Survey (Triggered)<\/h3>\n
Subscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n