The stock market just wrapped up one of its strongest first halves in years.In the first six months of 2026, the Dow was up 8.9%, marking its best first half since 2021. The S&P 500 gained 9.6%, and the Nasdaq added 12.8%, while the Russell 2000 soared nearly 22% for its best first-half showing since 1991.Much of the rally has been driven by AI and semiconductor stocks, with Micron (MU), Intel (INTC), and Advanced Micro Devices (AMD) adding roughly $2 trillion in combined market value during the second quarter, CNBC reported.Despite that momentum, Bank of America isn’t becoming more bullish for the second half of 2026.In a recent research note sent to TheStreet, Bank of America reiterated its year-end 2026 S&P 500 target of 7,100, arguing the index could fall about 5% from current levels as some of the biggest forces that fueled the bull market begin to disappear. The S&P 500 index trades at 7,488 as of writing.Bank of America says the market’s biggest tailwinds are reversingBank of America said its bearish outlook isn’t simply about elevated valuations.”We maintain our … S&P 500 2026 year-end target of 7100,” the analysts wrote, adding that “the S&P 500’s lofty multiple has been, in our view, justified by asset-lightness, balance sheets, capital discipline and earnings quality.”The concern, the analysts said, is that many of the conditions that had supported stocks are beginning to reverse.Related: Goldman Sachs doubles down on stock market outlook for 2026″Equity supply/demand dynamics peaked in bullishness in 2025, with liquidity coming from every channel -easy central banks, accelerating earnings, accelerating buybacks, individual and institutional investor inflows, US government inflows and a spike in take-privates amid a dearth of IPOs. Today, these levers are reversing,” they wrote.The firm also expects a more restrictive monetary backdrop ahead. Its analysts now forecast three 25-basis-point Federal Reserve rate hikes this year, reflecting “stickier inflation and tighter labor markets.”
The S&P 500 gained 9.6% in the first half of 2026.Getty Images
Bank of America prefers value stocks over expensive AI winnersWhile AI enthusiasm has driven tech capex and stocks higher, Bank of America believes investors should begin looking elsewhere.According to Bank of America, AI spending is leaving Big Tech with less financial flexibility, leaving those companies with little room to scale back spending without jeopardizing their AI ambitions.Instead, the bank favors companies benefiting from the AI investment cycle rather than the companies funding it.”What should one own during a capex boom? Capex takers in cyclical, manufacturing sectors that throw off cash, not secular growth companies that need to raise capital to compete,” the analysts said.More Stocks:Top analysts set jaw-dropping Micron stock target after surgeRocket Lab’s $8B Iridium deal opens new satellite-phone testAfter beating Samsung, tech titan files for IPOBank of America said traditional cyclical sectors, including Financials, Energy, and Materials, have the strongest cash returns to shareholders, while hyperscalers and Consumer Discretionary companies rank among the weakest.The analysts added that S&P 500 companies’ refinancing risk is lower than that of Russell 2000 firms because about 70% of their debt is long-term and fixed-rate. That means most large-cap companies won’t have to refinance much of their debt at today’s higher interest rates. However, REITs and telecom companies remain more exposed to refinancing risks that could weigh on earnings.Bank of America also said investors are still paying near-record premiums for long-term growth stocks even as sales revisions have shifted toward Tech Hardware, Energy, and Materials. With expectations for cyclical sectors remaining relatively low, Bank of America said these sectors have a more attractive risk-reward profile, adding that “the current risk/reward in cyclical capex beneficiaries is strong.”Related: Nvidia’s workplace culture sends Big Tech a warning