Bank of America has issued a stark warning about S&P 500 valuations, finding the index expensive on 18 of 20 valuation metrics. Analyst Savita Subramanian's research note reveals that four measures are near record highs, prompting BofA to maintain one of Wall Street's lowest year-end 2026 targets at 7,100.

Despite expectations for earnings growth of 14%, BofA anticipates significant multiple compression rather than valuation mean reversion. The bank's forecast is driven by fundamental and macroeconomic factors rather than statistical adjustments. Subramanian specifically highlighted the software sector, which has become 2026's worst-performing industry, down 20% year-to-date amid AI-related concerns.

BofA outlined five drivers for further multiple compression, including disruption math where price declines typically lead to earnings downgrades and an impending glut of IPO issuance. The bank noted that strong earnings years historically saw PE multiple compression 66% of the time. Additional factors include rising asset intensity, higher leverage, and potential index risks from private market volatility. The software sector, trading 20% below its long-term average, exemplifies the broader valuation challenges facing the market.