Another year, another double-digit gain for the S&P 500.

But while AI seems to be an unstoppable force propping up the three-year bull rally, Bank of America says unique risks are emerging.

Much of the market’s gain since the October 2022 low has been driven by endless enthusiasm for AI, and companies have supported investors’ bullish views by committing to staggeringly expensive capex plans.

While BofA analysts say AI bubble risks have grown, some unique factors could emerge as headwinds to the market’s continued rally.

5 big risks

The analysts noted that by historical standards, the S&P 500 appears expensive, with valuations rising even higher than the 1990s tech boom.

While they acknowledged that the companies powering the index’s growth this time appear financially stronger and carry less debt, they still see several risks that investors shouldn’t disregard.

First, the bank’s team, led by analyst Savita Subramanian, believes that signs of a bear market are flashing, even as market growth appears robust. “Those that tripped over the last few months include high PE, expensive v. cheap stock performance and credit indicators.”

Subramanian said that, historically, when 70% of these warning signs flash, a peak often follows, leading investors into a bear market. So far, 60% of the signals that the bank tracks have flashed.

Second, the analysts say that the AI boom is at odds with consumer resilience. As they see it, the rise of AI may compel companies to eliminate more white-collar workers who have helped drive robust consumer spending. To account for this risk, they recently lowered their rating on the consumer discretionary sector of the stock market.

Third, the bank sees budding risk in the “Gordion knot” of mega-caps, private companies, and the US government. “Uncle Sam buying stocks isn’t new but is more often a bailout than a strategic investment. Again, not a risk in itself, and may be net bullish – a new, likely long-term, buyer of US stocks – but it adds to the complexity.”

Fourth, the analyst says there is a high risk stemming from macroeconomic uncertainty. The “macro fog” around tariff impacts, as well as a lack of new data during the government shutdown, has investors flying blind. “October brought China / US trade re-escalation and a shutdown in the US government and, as such, economic data. A pause in activity is likely on constrained visibility, and this is what stymied a pickup in economic activity in 2Q/3Q.”

Fifth and finally, the bank chimed in on concerns that have arisen recently in the private credit world, flagging “canaries and cockroaches” in a reference to Jamie Dimon’s comments last week on several high-profile bankruptcies. Credit concerns spiked last week after two regional banks reported issues with borrowers.

“Banks had good results, were cautiously optimistic, but recent credit events suggested ‘probably more’ cockroaches to come,” the analysts wrote. “In our view, regulated banks are better capitalized and thus better insulated from a credit cycle, but the S&P 500 index may be vulnerable for an odd reason: liquidity.”