Bank of America: A clear turning point for US stocks may be elusive; focus on cash flow, diversification and value traps

Why does BofA think a clear entry signal may never arrive?

In recent discussions with investors, BofA has often heard the idea of waiting for an IPO, the midterm elections or third-quarter results from big technology companies to provide a clear signal. The bank believes investors are unlikely to find a moment that resolves all their doubts.
As examples, BofA notes that a major IPO this year fluctuated repeatedly around the end of its lock-up period, share-price reactions to third-quarter results were also relatively muted, and market direction after recent policy surprises has not always matched expectations.

Roles in the AI industry are changing: semiconductor companies are increasing spending, hyperscale cloud providers are integrating both upstream and downstream in the value chain, and IT services providers are seeing increased demand for AI specialists. BofA believes capital expenditure, revenue, and the costs and sources of financing are all difficult to forecast accurately.
The bank therefore favors AI beneficiaries whose earnings are backed by cash. Its screening criteria include positive free cash flow over the next 12 months, a high ratio of operating cash flow to net income over the past 12 months, and a low valuation relative to expected revenue growth. Higher interest rates increase financing costs for companies reliant on external funding.
For AI application companies, BofA screens for efficiency gains using the change in rolling 12-month revenue per employee over the past two years, excluding companies that directly benefit from AI infrastructure buildout. This metric measures changes in revenue and workforce size.

BofA notes that gold has become positively correlated with equities since March 2026; historically, when the yield on 10-year US Treasuries exceeded 6%, stock-bond correlations also tended to turn positive, challenging traditional diversification.
As of 27 October 2026, nearly 200 stocks in the S&P 500 had negative daily betas over the previous six months, more than twice the previous peak in 2001. This means these stocks recently tended to move in the opposite direction to the index.
Another clue is high dividends: a factor constructed from the highest-yielding tenth of S&P 500 stocks had returns relative to the index that were negatively correlated with index returns in 34 of the past 40 years. In four of the past five years, its negative correlation was stronger than that of gold, bonds, real estate and alternative assets.

In the month covered by the report, the value style rose 7%, while growth and momentum fell 2% and 5%, respectively. The free-cash-flow-to-enterprise-value measure led performance; it incorporates capital expenditure and leverage into valuation.
BofA expects profit growth to slow and believes this environment often favors reasonably priced growth stocks. Its “opportunity” screen requires relatively inexpensive valuations, share-price outperformance against the index over the past three months, and upward revisions to expected earnings per share over the next 12 months relative to the index.
By contrast, the “value trap” screen also looks for relatively inexpensive stocks, but with both negative relative share-price momentum and negative earnings estimate revisions over the past three months, suggesting low valuations may be accompanied by weakening business expectations.
For income investors, BofA favors the quintile with the second-highest dividend yields in the Russell 1000 index. The highest-yielding group may include companies whose yields appear high because their share prices have fallen and which face potential pressure to cut dividends.