Investing.com -- Bank of America strategists believe 2026 has officially ushered in a new market regime, defined by rising corporate earnings but shrinking valuations, with significant implications for how investors should position across sectors.

Led by equity strategist Savita Subramanian, BofA stated in a note that "the year of higher EPS, lower PE has officially begun," highlighting that despite the S&P 500's apparent round-trip in index terms, there has been more than 10% price-to-earnings compression since 2025, driven by significant earnings revisions.

The bank maintains a year-end S&P 500 target of 7,100, alongside a 13% EPS growth forecast, implying the PE ratio has further to fall.

Technology, media and telecoms stocks saw the sharpest multiple compression, which BofA views as justified given rising capital intensity and leverage in the sector.

The bank also flags slowing buybacks, less dovish central banks, and inflation as additional drivers of de-rating, with large Tech IPOs and lagged oil shock impacts still on the horizon.

On sector positioning, BofA urges caution on Industrials, describing the sector as "more expensive than ever" and at peak buy-side exposure, warning it has effectively become a backdoor play on oil, defence, and AI combined.

The bank remains overweight Staples and underweight Discretionary, citing likely consumer trade-down if professional services jobs are displaced by AI. In Financials and Technology, BofA sees rich stock-picking opportunities despite recent indiscriminate sector-wide selling, while flagging Health Care's falling R&D spend as a potential justification for a lower long-term multiple.