BofA profit-taking call preceded a sharp Nasdaq retreat

Bank of America told clients on June 5 to take some gains off the table after its market-warning checklist grew more crowded, Fortune reported. Days later, the Nasdaq had dropped about 7% from its June 1 high, underscoring how exposed investors had become to the year’s strongest technology trades.

Savita Subramanian’s strategy team at BofA said seven of the firm’s 10 bear-market indicators had been triggered, according to Fortune. Five had flashed by April, and two more appeared in May, prompting the bank to tell investors to reduce positions in recent winners.

BofA’s year-end target for the S&P 500 is 7,100, Fortune reported. That was below the index’s level of 7,367 when Fortune published; by Wednesday’s close, the S&P 500 had fallen about 4.5% from its June 1 record to 7,267.

The Dow had declined about 2.7%, or roughly 1,400 points, over the same stretch, according to Fortune. The Nasdaq’s pullback was steeper because the selling centered on high-growth technology shares, especially semiconductor and memory names that had powered earlier gains.

Semiconductor trade loses steam

Fortune reported that the Direxion Daily Semiconductor Bull 3X fund, a leveraged vehicle tied to chip stocks, returned 75.9% in May while still seeing $4.1 billion in withdrawals during the month. It was the fund’s second straight month of outflows, according to Fortune, as traders took money out of a leading market trade.

The Philadelphia Semiconductor Index fell 10.3% on June 5, its worst session since 2020, Fortune reported. Broadcom’s cautious outlook and concerns about excess memory supply helped trigger the selling, wiping out more than $1 trillion in market value in one day, according to the report.

Micron, which Fortune described as central to the memory-stock story, suffered the hardest hit. A rebound attempt on Monday faded by Tuesday, and indexes were lower again by Wednesday before a Thursday bounce tied to stabilizing news from Iran, Fortune reported.

Warning signals BofA tracks

BofA’s 10 indicators span sentiment, valuation and economic conditions, according to Fortune. The bank said both valuation measures were flashing: the Rule of 20, which combines the market’s price-to-earnings ratio with inflation, and the gap between expensive and cheap stocks.

Fortune reported that the market had a trailing price-to-earnings ratio above 30 and inflation above 4%, putting the Rule of 20 measure well past BofA’s threshold for expensive stocks. The firm also said the spread between highly valued stocks and cheaper ones had reached levels it views as speculative.

Three of BofA’s five sentiment gauges had also triggered, Fortune reported. Those included upbeat investor expectations for further stock gains, elevated long-term earnings forecasts from analysts and strong dealmaking activity, which BofA views as common near market tops.

BofA’s two credit indicators had also flashed, according to Fortune. One tracks stress in corporate borrowing markets, while the other uses the Federal Reserve’s loan officer survey to assess whether banks are tightening access to credit.

Other strategists see a healthier shift

Morgan Stanley took a less bearish view, Fortune reported. Its strategists described the sell-off as healthy and said a shift in technology leadership could help extend the bull market, rather than end it.

Morgan Stanley expects the S&P 500 to reach 8,000 by year-end, according to Fortune, as money moves out of memory and semiconductor stocks and into a wider set of shares. Fortune also reported that nearly 63% of stocks advanced on Wednesday even as the Dow lost 950 points, a sign that selling was concentrated in market leaders.

Subramanian said BofA’s bear-market signposts, which typically appear before an S&P 500 peak, suggested that more caution may be warranted, according to Fortune. Investors were also preparing for SpaceX to price what Fortune described as the largest IPO in history, with Anthropic and OpenAI expected to follow.

This story draws on original reporting from Fortune.