Is Wall Street Valuation Ripe? 4 ETFs May Protect You

But what’s next? Further rally or a correction?

Bank of America’s Bull & Bear Indicator Nears Peak Sell Signal

Bank of America's closely watched Bull & Bear Indicator has climbed again, reaching its highest level since 2021. The contrarian sentiment gauge rose from 9.5 to 9.6 over the past week, reinforcing the sell signal it first triggered in May, as quoted on Business Insider.

The indicator is designed to flash a sell signal when investor optimism becomes excessive and a buy signal when sentiment turns extremely bearish.

Indicator Has a Strong Track Record

The Bull & Bear Indicator is based on several market measures, including hedge fund positioning, equity and bond fund flows, and technical indicators. Historically, the signal has often preceded periods of market weakness.

Since 2002, the indicator has generated 17 sell signals. Following those signals, global stocks have recorded an average decline of 2%-3% over the next three months, while the largest drawdowns have ranged between 15% and 20%. Bank of America noted that a buy or sell signal typically remains active for one to three months, per the same Business Insider source.

Wall Street Valuation Is High As Per Shiller P/E Ratio

S&P 500's Shiller P/E Ratio, which is also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), reached 42.84, or roughly 146% above its 155-year average in early June, per Motley Fool, as quoted on Yahoo Finance.

The valuation metric is based on average inflation-adjusted EPS over the trailing decade, ensuring that short-lived recessions can't offset its usefulness. Now, the current valuation of the S&P 500 is more than 140% higher than its 155-year historical average of about 17.4X.

Higher Interest Rates Could Pressure Stocks

Bank of America also warned that rising interest rates could become a headwind for equities.

Markets are currently pricing in a 91% probability that the Federal Reserve will deliver at least one additional rate hike before 2027, according to the CME FedWatch Tool, as quoted on Business Insider (at the time of writing).

AI Payoff Worries Will Linger

According to LSEG estimates cited by Reuters, Microsoft, Alphabet, Amazon, Meta Platforms, and Oracle are projected to spend more on capital expenditures than they generate in free cash flow by 2027.

Collectively, they are expected to add $340 billion in operating cash flow between 2025 and 2027 while increasing capital spending by nearly $534 billion—about $1.57 in new investment for every additional $1 of operating cash flow, per a Guru Focus article, as quoted on Yahoo Finance.

AI-Led Inflation in the Cards?

Goldman Sachs recently warned that the rapid adoption of AI is likely to fuel inflation globally as supply struggles to keep pace with soaring demand for critical AI components, including memory chips and semiconductors, according to a Business Insider article, as cited by Yahoo Finance (read: Goldman Sounds Alarm on AI-Driven Inflation: ETFs to Watch).

AI Concerns Grow, But Investors Remain Loyal

While concerns about the sustainability of the artificial intelligence-driven rally have increased, investors remain heavily exposed to risk assets. Bank of America's latest Fund Manager Survey found that many global investors now view an AI stock bubble as one of the biggest risks for markets.

Even so, investors remain close to fully invested, with cash allocations falling to a record low of 3.6% in July, indicating continued confidence in equities despite mounting valuation concerns, the same Business Insider source highlighted.

How to Play the Scenario?

Consumer Staples – State Street Consumer Staples Sel Sect SPDR ETF XLP

Consumer staples are a defensive, non-cyclical sector. Bank of America economists noted that, excluding gasoline, spending by lower-income households has outpaced that of higher-income households for two straight weeks, per Yahoo Finance. Since lower-income consumers allocate a larger share of their budgets to essential goods, the trend should support demand for consumer staples stocks. XLP (up 3.2%) topped the S&P 500-based ETF SPY (flat) over the past month (as of July 28, 2026).

Dividend Growth – Vanguard Dividend Appreciation Index Fund ETF VIG

With stock valuations stretched and AI-related risks mounting, dividend growth ETFs offer a defensive way to stay invested. Their focus on high-quality companies with steadily rising dividends provides income and resilience during uncertain markets. VIG is up 2.5% over the past month.

Cash-Like ETF – iShares 0-1 Year Treasury Bond ETF SHV

As of July 28, 2026, the yield on a one-year U.S. Treasury note topped the 4% mark. Moreover, ultra-short-term bonds have lower interest rate risks. SHV is down only 0.01% over the past month, but it yields about 3.78% annually.

Financials – State Street Financial Sel Sec SPDR ETF XLF

Likely growth in spending across both lower- and higher-income consumers signals a resilient economy, creating a favorable backdrop for banks. Strong trading activity, resilient consumer spending, healthy loan demand, good capital market activity and higher investment banking fees are positives for the financial sector. XLF is up 7.2% over the past month.

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This article originally published on Zacks Investment Research (zacks.com).

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