Bank of America's Savita Subramanian, head of US Equity and Quantitative Strategy, indicates that the S&P 500 is overdue for a significant pullback. She notes that the market has only experienced one 5% decline this year, in contrast to a typical annual average of three such pullbacks. Furthermore, there hasn't been a 10% correction since spring 2025, suggesting a heightened risk of one occurring soon.
Subramanian maintains a cautious near-term outlook despite raising her year-end S&P 500 target to 7,400 from 7,100, which still implies approximately a 3% downside from current levels. She also sets a 12-month target of 7,800, offering less than 2% upside. These targets are notably lower than those from other major banks, such as Barclays at 7,950, HSBC at 8,100, and Fundstrat's Tom Lee at 8,000.
Her concerns are reinforced by several factors, including the market entering a seasonally weak period (September-October), elevated Treasury yields, inflation-driven expectations for Federal Reserve rate hikes, and increasing pressure on AI-related stocks. Subramanian also highlights risks associated with rising leverage in the AI sector and unusually tight credit spreads, which could signal credit deterioration. She advises against holding cash due to low real returns, suggesting large-cap value stocks as a better alternative.
This comes as other financial institutions also signal caution. Bank of America has warned of a potential $163 billion forced-selling risk if systematic funds reach their selling thresholds. This imbalance, with an 18-to-1 tilt toward selling, is the most pronounced in years, according to their analysis. Other risk frameworks from Deutsche Bank and Goldman Sachs also show systematic equity exposure at or near historical highs, increasing market vulnerability in the event of a downturn.
