Wall Street analysts are revising their earnings forecasts for S&P 500 companies at the fastest pace since the post-pandemic recovery. Consensus earnings estimates have surged nearly 20% over the past six months — the largest six-month gain since 2021. Corporate earnings are expected to grow by 25% over the next year. However, I see clear signs here of a dangerous "earnings bubble" forming.
The numbers may not match reality
The market is pricing in such aggressive growth that it is typically only seen during recovery phases after crises. As Ben Inker, co-head of asset allocation at GMO, notes, "forecasts for the next two years are rising unusually fast — we haven't seen this outside of post-crisis recovery phases." In his view, exchanges will eventually realize that these expectations will not materialize.
The bulk of the revisions are driven by chipmakers and server manufacturers, whose stocks are at the center of growth amid the frenzy around artificial intelligence. Michel Lerner, head of the HOLT analytical platform at UBS, warns of an "earnings bubble" forming. AI-related stocks are already pricing in sustained super-profits, but the likelihood of maintaining such a level of profitability is extremely low. This is a classic trap for investors chasing past successes.
The S&P 500 index itself has risen 20% over the year, while the Nasdaq Composite has gained more than 25%, posting its best quarter in six years. Stocks are now trading at nearly 20 times projected earnings — significantly below the peaks of the dot-com bubble or last year's rally, but still high given current macroeconomic risks.
Earnings and artificial intelligence bubbles are brewing
Kasper Elmgreen, chief investment officer for fixed income and equities at Nordea Asset Management, emphasizes that the market has almost no room for error. Corporate earnings are approaching the second quarter with minimal margin of safety. He questions whether companies can continue to consistently delight investors with above-expectation results.
Additional pressure comes from a shift in rate expectations. Traders are now pricing in at least one 0.25 percentage point rate hike by the end of the year, signaling a departure from previous expectations of cuts. This puts further pressure on earnings multiples, which already seem inflated.
My analysis: The market is clearly overheated, and current S&P 500 earnings forecasts look excessively optimistic. Investors should exercise caution: if even part of these expectations fails to materialize, the correction could be painful. The "earnings bubble" is not just a term, but a real threat for those entering the market at its peak.