Bank of America's top equity strategist delivered a sobering message to start 2026: there's simply no way to sugarcoat it—the S&P 500 is expensive.

In a research note published this week, Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, revealed that the benchmark index is registering high valuations on 18 of 20 metrics her team tracks. These include trailing price-to-earnings ratio, enterprise value to EBITDA, and forward consensus PE.

Historic Valuations on Multiple Fronts

What makes Subramanian's warning particularly striking is that the S&P 500 has "never been more expensive" when measured by four specific metrics: market capitalization to GDP, price to book value, price to operating cash flow, and enterprise value to sales.

"No way to sugar coat it: the S&P 500 is expensive. Risks to the index abound in 2026."

— Savita Subramanian, Bank of America

Her year-end price target of 7,100 for the S&P 500 is the most bearish among major Wall Street strategists surveyed by CNBC. That implies a gain of just 3.8% from recent levels—a far cry from the 16% return investors enjoyed in 2025.

The Multiple Compression Thesis

Subramanian's base case assumes that while earnings will grow in the mid-double digits, stock valuations will compress by 5-10% as the market digests its elevated starting point. Her bear and bull case range spans from 5,500 to 8,500.

"I think it's going to be a year where we see some significant multiple compression," she stated, pointing to the disconnect between AI-fueled optimism and underlying economic reality.

The AI Concentration Risk

One of Subramanian's key concerns centers on market concentration in AI-related names:

  • The stocks dominating the S&P 500 are not economically sensitive companies
  • They're primarily "buy-the-dream" AI plays
  • These names may be headed for "an air pocket" in 2026

She also flagged the risk of a slowing labor market as artificial intelligence implementation leads to job cuts—a dynamic that could undermine both corporate earnings and consumer spending.

Where to Find Value in an Expensive Market

Despite her cautious overall stance, Subramanian identified sectors where investors can still find opportunity. Health Care and Real Estate stand out as "inexpensive relative to historical market multiples."

Bank of America's momentum and value model now ranks Health Care as the number one sector and Real Estate as number three. The firm is overweight both for investors with a medium-term outlook of roughly 12 months.

"These sectors are cheap for good reasons: positive trends in revisions compared to the broader market, plus a three-month run of outperformance. These factors in concert indicate good value."

— Savita Subramanian, Bank of America

What This Means for Investors

The valuation warning comes as Wall Street broadly expects gains for 2026, with the average S&P 500 target around 7,629 according to the CNBC Market Strategist Survey. That unanimity itself may be a warning sign for contrarian investors.

For those concerned about elevated valuations, Subramanian's analysis suggests several approaches:

  • Rotate into value sectors: Health Care and Real Estate offer relative value
  • Be selective in tech: Not all AI plays will deliver
  • Prepare for volatility: Multiple compression could trigger significant drawdowns
  • Focus on fundamentals: Companies with strong earnings growth may outperform

The Bottom Line

Bank of America's valuation warning serves as a crucial counterweight to Wall Street's generally bullish 2026 outlook. While the firm isn't calling for a crash, its analysis suggests that the risk-reward equation has shifted meaningfully after three consecutive years of double-digit gains.

Investors entering 2026 with fully invested portfolios may want to consider rebalancing toward sectors that offer better value and more realistic expectations. In a market that has "never been more expensive" by multiple measures, the margin for error has never been thinner.