Strategists Smell an "Earnings Bubble" While Wall Street Keeps Inflating It 🎈

Wall Street analysts are lifting S&P 500 profit forecasts at the fastest pace since the pandemic rebound, a surge that has strategists warning the figures may not hold up as the index sits near record highs. Consensus estimates call for S&P 500 company earnings to grow 25% over the coming year, with profit projections jumping nearly 20% in six months, the sharpest six-month rise since 2021, according to data cited by the Financial Times.

GMO co-head of asset allocation Ben Inker said forecasts for the next two years are "rising at an exceedingly high rate, nothing we have seen outside of a crisis recovery," adding that markets will eventually realize the numbers will not come true. The bulk of the upgrades are concentrated in chipmakers and hyperscalers riding artificial-intelligence-driven stock rallies, a narrow leadership that has done most of the heavy lifting during the benchmark's advance.

Michel Lerner, who leads UBS's HOLT analytics platform, warned that an "earnings bubble" is forming, arguing that AI-linked shares are priced to maintain supernormal profits and that sustaining current profitability and growth is highly unlikely. The S&P 500 has climbed 20% over the past year and the Nasdaq Composite has gained more than 25%, including its best quarter in six years, even as forward valuations sit near 20 times earnings, well below dot-com-era peaks but vulnerable to any disappointment.

Kasper Elmgreen, chief investment officer for fixed income and equities at Nordea Asset Management, said earnings carry a slim margin of safety heading into second-quarter reporting season and questioned how long positive surprises can continue. Compounding the pressure, traders now price in at least one quarter-point rate hike by year-end, a reversal from earlier bets on multiple cuts that tightens the conditions facing already-stretched profit assumptions.