The S&P 500 just posted its best quarter since 2020 and is up about 9% this year, but it’s mostly down from there, according to Bank of America.
In a note Tuesday, analysts reiterated their year-end price target for the broad market index at 7,100, representing a 5% decline from the week’s close.
“Our bear market indicators suggest speculation is reaching extreme levels as large-cap stocks clearly gap up, an event that has historically preceded valuation pullbacks,” BofA said.
The bank added that S&P 500 companies are generating less free cash flow relative to net income compared to historical trends. That’s why so-called hyperscalers have seen their free cash flow fall as massive spending on the artificial intelligence boom drags down their earnings.
At the same time, the Federal Reserve is grappling with stagnant inflation after allowing it to exceed its 2% target for more than five years. Bank of America recently predicted that the Fed has run out of patience and will raise rates three times this year to finally curb inflation.
Of course, the S&P 500 has generally delivered positive returns during previous rate tightening cycles, as stocks peaked six to 12 months after the first rate hike.
But a Fed rate hike now would have a different impact, BofA explained, because the S&P 500 is more expensive in the lead-up to the first rate hike than in any other cycle except the one that lasted from 1999 to 2000.
Chip stocks in particular have been rising astronomically lately as the unrelenting artificial intelligence boom causes demand to soar. Micron Technology shares, for example, are up 242% in 2026 and up 700% from a year ago, even after the recent sell-off.
This has fueled fears that the good times could soon come to an end. After hitting an all-time high of 7,621 just a month ago, the S&P 500 began to fluctuate wildly, losing about 2%.
Elsewhere, stocks are on an even worse rollercoaster ride. South Korea’s Kospi stock index, dominated by AI darlings SK Hynix and Samsung, set a new record a few weeks ago but days later suffered its fifth-worst daily drop on record.
Such moves are particularly troubling to Capital Economics, which noted that such sell-offs have previously only occurred during bear markets such as the Asian financial crisis, the dot-com bubble and the Great Financial Crisis.
“This volatility, in our view, is evidence of excessive froth and calls into question the sustainability of this rally,” analysts said.
Even JPMorgan’s mostly bullish forecast came with a warning of a “flash crash” last month. However, analysts raised their year-end S&P 500 target to 7,800 from 7,600, citing strong earnings estimates.
The forecast suggests the Fed will keep rates steady this year and then raise them next year, while the market’s top gainers will remain concentrated in AI stocks.
“However, the path to growth is likely to be non-linear given a tighter earnings target in the second quarter, Momentum’s crowded positioning (especially in the low-quality and speculative growth segments) that continue to face a high likelihood of a flash crash, rapidly increasing stock supply, and potentially tightening monetary policy that could limit stock multiples,” JPMorgan wrote.
Others on Wall Street are more optimistic. Yardeni Research President Ed Yardeni, who has been harping on another Roaring Twenties since the start of the decade, raised his year-end target for the S&P 500 to 8,250 from 7,700 in May.
He noted strong corporate earnings and expectations that they will remain strong. Yardeni stood by his views over the weekend and rejected comparisons between today’s artificial intelligence boom and the dot-com bubble.
“The crash of the late 1990s was driven by the forward P/E of the S&P 500 information technology sector,” he wrote on Saturday. “This was driven by FOMO (fear of missing out). The current bull market is driven by FEMO (fantastic earnings momentum).”