Analysts at leading investment banks are revising profit growth forecasts for S&P 500 companies at the fastest pace since the post-pandemic recovery. However, in my assessment, these expectations, which are fueling new all-time highs for the index, may prove overly optimistic and inconsistent with the real economic picture.
Over the past six months, consensus profit forecasts have risen by nearly 20% — a record pace since 2021. Analysts are now projecting a 25% increase in S&P 500 company profits over the next year. Such optimism raises serious questions, especially given that the main growth drivers are chipmakers and server manufacturers, whose stocks are at the center of the artificial intelligence frenzy.
Numbers vs. Reality: Where Does the Risk Lie?
Ben Inker, co-head of asset allocation at GMO, rightly notes that such a pace of forecast revisions outside a post-crisis recovery phase is extraordinary. He warns that the market may face a harsh reality when these expectations fail to materialize.
Michel Lerner, head of the HOLT analytical platform at UBS, goes further, speaking of the formation of a "profit bubble." In his view, AI-related stocks already price in the persistence of super-profits, but the likelihood of maintaining such a level of profitability and growth rates is extremely low. This is a classic sign of overheating.
The S&P 500 index has risen 20% over the year, and the Nasdaq Composite has gained more than 25%, posting its best quarter in six years. Meanwhile, stocks are trading at nearly 20 times projected earnings. Although this multiple is below the peak levels of the dot-com bubble or last year's rally, it remains high, especially given that the market leaves companies virtually no room for error.
Pressure from All Sides: Rates and Multiples
Kasler Elmgrin, chief investment officer for equities and fixed income at Nordea Asset Management, emphasizes that the market has almost no margin of safety. He questions companies' ability to consistently deliver results that exceed expectations.
Additional pressure comes from shifting expectations regarding monetary policy. Traders are now pricing in at least one 0.25 percentage point rate hike by the end of the year. Such a reversal signals a departure from previous expectations of rate cuts, putting further pressure on already inflated earnings multiples.
My opinion: The market has found itself trapped by its own expectations. The "AI profit bubble" combined with simultaneous tightening of monetary conditions creates an extremely volatile mix. Investors should prepare for a significant correction if at least one of these factors begins to crack.