Strategists Warn of ‘Earnings Bubble’ as Wall Street’s Profit Forecasts Surge

Wall Street analysts are raising S&P 500 profit forecasts at the fastest pace since the pandemic rebound. Several strategists now warn the estimates propping up the market’s record rally may not hold up.

Analysts expect S&P 500 company earnings to grow 25% over the coming year, according to data cited by the Financial Times. Consensus profit estimates have jumped nearly 20% in six months, the sharpest six-month rise since 2021.

The Numbers May Not Be Real

Ben Inker, co-head of asset allocation at GMO, said forecasts for the next two years are “rising at an exceedingly high rate, nothing we have seen outside of a crisis recovery.” He expects markets to eventually realize the numbers will not come true.

Chipmakers and hyperscalers riding AI-driven stock rallies are driving most of the upgrades. Michel Lerner, who leads UBS’s HOLT analytics platform, warned of an “earnings bubble” forming in the market. He said shares tied to AI are priced to maintain supernormal profits, and that sustaining current levels of profitability and growth is highly unlikely.

The S&P 500 has climbed 20% over the past year. The Nasdaq Composite has gained more than 25%, including its best quarter in six years. Rising forecasts have kept valuations in check even as indices hit fresh highs. Stocks now trade near 20 times forward earnings, well below the levels hit during the dot-com boom and last year’s rally.

Earnings and AI Bubbles Are Building

Kasper Elmgreen, chief investment officer for fixed income and equities at Nordea Asset Management, pointed to a thin cushion for error. He said earnings carry a slim margin of safety heading into the second-quarter reporting season. He questioned how long positive surprises can continue.

Investors flagged a separate risk. Traders now price in at least one quarter-point rate hike by year-end. That marks a reversal from earlier bets on multiple cuts, adding fresh pressure to profit assumptions that already look overstretched.