Investing.com -- The S&P 500 has fallen 7% from its peak, and earnings estimates for 2025 have been cut by about 4 percentage points.

However, according to Bank of America analysts in a note Friday, the index "remains statistically expensive on almost every measure we track."

Despite arguments for the S&P 500’s quality—such as asset-light business models and stable earnings—BofA warns that "policy uncertainty" and "increased asset intensity and margin risk for US Tech" have weakened these advantages.

BofA notes that European investors are showing a preference for European equities over U.S. stocks.

"US large caps remain twice as expensive as Europe, with the S&P 500 trading on 20x forward earnings vs. 14x in Europe, double the long-term average premium," the firm said.

While this valuation gap peaked at 69% after the U.S. election, it has since narrowed by 26 percentage points, mainly due to U.S. Tech and Auto stocks declining and European Banks and Defense stocks rebounding.

Despite these valuation concerns, BofA still sees structural advantages for U.S. equities, including "clean corporate (and most consumer) balance sheets," "high corporate transparency," and "USD reserve status."

However, they add that emerging risks could weigh on U.S. stocks, particularly in the tech sector, where "Hyperscalers’ AI capex arms race" is increasing margin risks.

Additionally, BofA points to policy uncertainty, higher government debt, and the U.S.’s "higher proportion of low-income workers, a pocket with building risks."

While BofA maintains long-term confidence in U.S. stocks, particularly in Large Cap Value, it notes that "continued inflows could have an outsized bullish impact on EU equities" once tariff uncertainty clears.

Even so, the bank believes the structural advantages in the U.S. mean there is “more long-term alpha opportunity,” especially within large-cap value.