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

Key Takeaways

• Bank of America analysts on Tuesday left their S&P 500 year-end target unchanged at 7100, 5% below the index’s Monday close, citing Big Tech’s dwindling cash flows and the possibility of rate hikes.

• BofA sees opportunity in cyclical sectors like energy, materials, and tech hardware, which are growing fast due to booming data center spending and are positioned to weather higher rates.

Most on Wall Street expect more gains for stocks in the second half of 2026. Not everyone, however, is convinced.

Many of the dynamics that acted as tailwinds for the stock market in recent years—strong earnings, ample free cash flows, and high liquidity—“are reversing,” said Bank of America analysts in a note on Tuesday. The firm left its year-end S&P 500 target unchanged at 7100, implying about 5% downside from Monday’s close. The index was up about 9% this year through yesterday after a double-digit second-quarter advance.

Bank of America has one of the most pessimisticmarket outlooks on Wall Street. Its target is the lowest of the 14 firms tracked by CNBC’s strategist survey and nearly 10% below the median. The consensus on Wall Street heading into the second half of the year is that the strong earnings growth that’s propelled the market to record highs is likely to keep stocks buoyant through year-end. 

Why This Is Important

Analysts on Wall Street are generally optimistic that corporate America’s fastest earnings growth in years and a surprisingly resilient economy can push the stock market to more records this year.

Bank of America sees cracks in the façade of the earnings narrative that has the rest of Wall Street excited. The first quarter was the S&P 500’s best in terms of earnings growth since 2021, but the index got an artificial boost from the paper value of investments, according to BofA. Strip out one-time gains for Alphabet (GOOG), Amazon (AMZN), and Meta (META), the bank argues, and the S&P 500’s profit growth declines to 19% from 27%. 

Big Tech’s other weakness is its waning ability to adapt to shifting circumstances. Tech giants’ free cash flow as a share of earnings has collapsed to near 0% due to the AI data center buildout, on which hyperscalers Alphabet, Microsoft (MSFT), Amazon, Meta, and Oracle (ORCL) are expected to spend well over $700 billion this year. That spending both ties Big Tech’s hands—“they can’t cut capex like in 2022/2023 without dropping out of the AI race,” the analysts wrote—and drains coffers that could be used on stock buybacks that support share prices and attract investors. 

Then there’s the economy. With inflation surging to a three-year high last month and the labor market appearing stronger than expected, Bank of America’s economists now expect the Federal Reserve to increase interest rates by three-quarters of a percentage point this year. The S&P 500 has historically seen positive returns during rate hiking cycles, but BofA notes that in three of the last eight cycles, the index peaked within an 18-month window around the first hike. In addition, the S&P is more expensive now than it was heading into any of those hiking cycles except the 1999 hikes that popped the Dotcom Bubble. 

Granted, higher inflation, rates, and capital expenditures can be bullish for certain stocks, if not the market as a whole. Historically, companies either returning cash to shareholders at a high rate or trading at modest valuations tend to perform best during rate-hiking cycles, according to BofA. At the moment, booming AI spending is generating ample cash and boosting sales growth for companies in cyclical sectors like tech hardware, energy, and materials, but their stocks aren’t reflecting that growth, by BofA’s measure.

“The current risk/reward in cyclical capex beneficiaries is strong: expectations are lower, the cash return and value characteristics that they sport have performed well during prior tightening cycles, and inflation is more of a positive than a negative in these sectors,” the analysts wrote. 

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