Bank of America has raised its 2026 S&P 500 earnings-per-share forecast to $335, implying 22% year-over-year growth, but the firm says it remains cautious on the index at large and pushed back on the common market narrative that semiconductors are overvalued while software shares are undervalued.
In a note to investors, analyst Savita Subramanian said semiconductor earnings have been revised up by more than 20% this year as artificial intelligence capital expenditure guidance increased, whereas software earnings advanced only 3% in the same period.
Despite that divergence in earnings revisions, Subramanian observed that active long-only relative exposure to both sectors stands at roughly 20% overweight. She noted semiconductors are still well below their 2017 peak of 40% overweight, and that software fund ownership breadth has exhibited little change, indicating there has not been a widespread sell-off in software holdings.
“Semiconductors sports its highest free cash flow yield in recent history,” Subramanian wrote, adding that software is trading near multi-year lows on the same metric. In Bank of America's short-term model, semiconductors rank among the top five sectors, while software ranks in the bottom third.
At the index level, BofA kept its year-end S&P 500 price target at 7,100, while noting the index currently trades expensive on 16 of the 20 metrics the firm monitors.
The analyst highlighted a move in the S&P 500 below its historical average price-to-earnings-to-growth ratio after a jump in consensus long-term growth expectations to 16% - the highest level since 2021. Subramanian cautioned that such elevated expectations have historically been a contrarian signal, writing that “growth is more likely to disappoint than exceed lofty expectations.”
“By applying the strong historical relationship to the current forecast, the S&P 500 is slated to decline by ~6%,” Subramanian added.
On sector positioning, Bank of America is overweight Consumer Staples and underweight Consumer Discretionary. The firm said it favors "needs over wants," citing the impact of technology-sector layoffs on consumption by skilled professionals.
What this means
- BofA sees stronger earnings momentum in semiconductors driven by AI capex revisions, while software earnings revisions have been modest.
- Valuation signals for the S&P 500 are mixed: the index appears expensive on most of BofA's metrics even as consensus long-term growth expectations have risen.
- Portfolio tilts favor Consumer Staples over Consumer Discretionary amid concerns about reduced spending by laid-off tech professionals.