Stock Market Crash: Bank of America Warns of 26% Downside For S&P 500

Of course, if the October 12, 2022 lows hold, that will no longer remain true when the current pullback is finished.Bank of America's Savita SubramanianIn every bear market since 1974, stocks have met at least eight out of the 10 criteria below before bottoming, Subramanian said in a note to clients on Monday.

One crucial unfulfilled criteria is the Rule of 20, or inflation and trailing P/E not adding up to a total below 20. Historically, high inflation has commanded lower valuations. But the market is trading at a trailing P/E of 18.3 despite the CPI's current level of 6.4%. By a number of measures, the S&P 500 remains overvalued. According to a list of 20 valuation metrics compiled by Bank of America, 17 of them remain expensive relative to their historic average.

In a note this week, Wilson said that the S&P 500 remains overvalued relative to history by price-to-earnings and price-to-sales metrics. He also reiterated the market's current overvaluation by measure of the equity risk premium, which is the market's assumed return over Treasury yields.

"[We] continue to believe that equity markets are trading too rich relative to most outcomes, particularly after accounting for stickier-than-expected inflation and more hawkish expectations for the Fed rate path, which should place both earnings and valuations squarely at risk," Krishna said in a client note. "History implies that for the current level of real rates the S&P 500 multiple is ~2.5x overvalued," the chief market strategist said.

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