Semis bubble? Software cheap? Why BofA's Subramanian disagrees

Investing.com -- Bank of America has raised its 2026 S&P 500 earnings per share forecast to $335, implying 22% year-over-year growth, while maintaining a cautious index-level view and pushing back on the prevailing narrative that semiconductor stocks are overvalued and software stocks are cheap.

Analyst Savita Subramanian told investors in a note that semiconductor earnings have been revised up more than 20% this year as artificial intelligence capital expenditure guidance jumped, while software earnings grew only 3% over the same period.

Despite this divergence, active long-only relative exposure in both sectors sits at roughly 20% overweight, and Subramanian said semiconductors remain well off their 2017 peak of 40% overweight, while software fund ownership breadth has barely moved, suggesting no real capitulation.

“Semiconductors sports its highest free cash flow yield in recent history,” said the analyst, noting that software is near multi-year lows on the same metric.

In BofA's short-term model, semiconductors rank in the top five while software falls in the bottom third.

On the broader index, BofA maintained its year-end S&P 500 target of 7,100, noting the index trades expensive on 16 of 20 metrics the firm tracks.

The S&P 500 has moved below its historical average price-to-earnings-to-growth ratio following a jump in consensus long-term growth expectations to 16%, the highest since 2021.

But Subramanian cautioned that such elevated expectations have historically served as a contrary indicator, arguing that "growth is more likely to disappoint than exceed lofty expectations."

“By applying the strong historical relationship to the current forecast, the S&P 500 is slated to decline by ~6%,” added Subramanian.

BofA is overweight Consumer Staples and underweight Consumer Discretionary, favoring "needs over wants" as tech-sector layoffs weigh on skilled professional consumption.

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