As the new year unfolds, positive sentiments resonate across Wall Street, yet a significant concern looms: stock valuations have reached strikingly high levels. According to Bank of America strategist Savita Subramanian, the S&P 500 is showing inflated valuations in 18 out of the 20 metrics she analyzes. These metrics include critical indicators such as the trailing price-to-earnings ratio, enterprise value to EBITDA, and the forward consensus price-to-earnings ratio.
Subramanian emphasized that the current state of the S&P 500 is unprecedented. It has “never been more expensive” when viewed through various lenses—market capitalization in relation 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,” she remarked, cautioning that “risks to the index abound in 2026.” With these metrics in mind, she anticipates the S&P 500 will close the year at 7,100, which is notably the most conservative estimate among participants in the 2026 CNBC Market Strategist survey. This projection indicates a modest gain of just 3.8% from the previous close, particularly as U.S. markets were closed Thursday in observance of New Year’s Day.
Among the risks highlighted by Subramanian is a potential slowdown in the labor market, driven largely by the ongoing implementation of artificial intelligence, which is expected to lead to job cuts. Despite these concerns, there are sectors within the market that she believes still present viable investment opportunities, notably health care and real estate.
“Health care and real estate are inexpensive relative to historical market multiples,” Subramanian stated. She noted that these sectors are not just cheap, but they also possess favorable trends compared to the wider market, alongside a three-month streak of outperformance. This array of factors suggests that these sectors could offer good value moving forward. Notably, both health care and real estate underperformed in the past year, with health care increasing by approximately 12% in 2025, while real estate experienced a slight decline.
As investors navigate the challenges ahead, keeping an eye on valuations and sector-specific dynamics will be crucial in determining the best strategies for success in 2026.
