SKN | Bank of America Raises S&P 500 Targets as Its AI Investment View Turns More Constructive

Key Takeaways:

• Bank of America raised its 2026 year-end S&P 500 target to 7,400 from 7,100 and established a 12-month target of 7,800.
• The bank expects S&P 500 earnings growth of 33% in 2026 and 12% in 2027, supporting its revised market framework despite continued valuation and inflation risks.
• BofA upgraded Communication Services to Market Weight from Underweight, reversing a June 2025 downgrade as the relationship between AI spending and cloud revenue begins to improve.
• The bank remains attentive to hyperscaler commitments and elevated technology earnings expectations, preferring established hyperscalers over the semiconductor trade at current levels.

Bank of America is becoming more constructive on U.S. equities, raising its S&P 500 targets as stronger corporate earnings begin to offset some of the valuation concerns that previously constrained its outlook. The bank’s U.S. Equity and Quant Strategy team raised its 2026 year-end target to 7,400 from 7,100 and established a 12-month target of 7,800.

The change is significant because BofA is not simply assuming that higher equity prices require further valuation expansion. Instead, its revised framework rests primarily on stronger earnings growth and an improving outlook for the technology investment cycle.

BofA Shifts Its Market Framework Toward Earnings

BofA expects S&P 500 earnings to grow 33% in 2026, followed by 12% growth in 2027. According to the bank, multiple compression has occurred alongside this improvement in earnings, helping explain why the institution can raise its index targets without relying on an aggressive expansion in valuation multiples.

However, BofA continues to identify a meaningful risk around inflation. The bank believes current market multiples imply a lower inflation environment than the U.S. economy may deliver in the near term, leaving the market vulnerable to a potential sell-off into year-end.

This creates a more balanced framework: earnings provide support, while inflation and valuation remain constraints.

Bank of America Reassesses the AI Trade

The more notable change within BofA’s strategy is its treatment of Communication Services. The bank upgraded the S&P 500 sector to Market Weight from Underweight, effectively closing out a downgrade that had been in place since June 2025.

The decision reflects BofA’s evolving assessment of the relationship between AI capital expenditure and cloud revenue. Alphabet, Meta, Microsoft, Amazon and Oracle have faced investor scrutiny as spending on AI infrastructure accelerated faster than cloud-related revenue in earlier periods.

BofA now expects cloud revenue at Microsoft, Amazon, Alphabet and Oracle to outpace capital expenditure growth in 2027. That shift could improve the economics of the AI investment cycle and support the bank’s more constructive view of the large technology platforms.

BofA Keeps a Close Watch on AI Capital Commitments

Despite the improved outlook, BofA is not dismissing balance-sheet and investment risks. The bank highlighted rising off-balance-sheet commitments, including uncommenced leases and non-cancellable contractual obligations among major hyperscalers. These commitments have grown substantially faster than reported debt in some recent quarters.

BofA also noted that long-term earnings expectations for Information Technology have reached 43%, an all-time high, while Communication Services expectations stand at 16%. Against that backdrop, the bank prefers established hyperscalers over the semiconductor trade at current levels.

For sophisticated wealth owners, the “So What?” is that BofA’s revised outlook is fundamentally an earnings and capital-efficiency call. The bank is becoming more constructive because it sees AI spending increasingly translating into revenue, but it continues to monitor inflation, contractual commitments and elevated earnings expectations. The next phase of its strategy will depend on whether those productivity and revenue gains materialize without requiring another substantial expansion in market valuations.

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