The U.S. stock markets are hovering close to recent record highs, bolstered by an exceptional earning performance from companies. For many investors, this scenario presents a clear buy signal: Rising profits justify higher stock prices. However, according to Bravos Research, this perspective may be overly simplistic. The analysis firm warns of a development that, while seemingly healthy at first glance, could pose significant long-term risks. Rather than a classic valuation bubble, the S&P 500 may face its next major test due to what could be termed as an earnings bubble.
The Threat of an Earnings Bubble
Analysts currently forecast that earnings for S&P 500 companies will grow at around 25% per year over the next five years. If realized, this growth rate would be historically unprecedented and approximately double the long-term average. Such projections could potentially see corporate earnings nearly triple during this period.
These extraordinarily optimistic expectations evoke memories of the euphoria during the dot-com bubble of the late 1990s. However, a crucial difference exists: back then, not only did earnings expectations rise, but the valuations of technology companies also soared. Today, many tech firms actually have lower price-to-earnings ratios, even as stock prices reach new peaks, leading some market participants to dismiss the idea of a bubble.
Bravos Research finds this interpretation to be dangerously naive. The core issue lies not in inflated valuations, but in unrealistic earnings expectations. Instead of a classic valuation bubble, we may be witnessing the emergence of an earnings bubble — a situation where corporate profits rest on shaky grounds.
The Role of AI in the Current Boom
A look back at history reveals that such patterns are not unprecedented. Analysts cite U.S. homebuilders in the early 2000s as an example. Their stocks surged for several years despite low valuations, primarily due to a massive spike in earnings fueled by low interest rates and easy credit access.
When the U.S. Federal Reserve tightened its monetary policy, this earnings boom collapsed abruptly, leading profits to plummet and stock values to drop by approximately 80%.
Bravos Research argues that a similar mechanism is unfolding in the technology sector today. Analysts expect a 42% profit growth for the IT sector in the upcoming year—the highest forecast in over two decades. This boom is primarily driven by massive AI investments from large hyperscalers, with projections of more than $760 billion flowing into data centers, power supply, and AI infrastructure this year alone. According to Morgan Stanley, this figure could rise to $1.5 trillion by 2028.
The Rally Continues, but for How Long?
The sustainability of this development largely hinges on financing conditions. Both the dot-com and housing bubbles burst when banks tightened their lending standards and liquidity began to dry up. Currently, however, this trend is not evident. U.S. banks are maintaining neutral credit standards, and these have even loosened slightly recently, making financing affordable for companies and allowing large-scale AI investments to continue.
This situation underscores the critical point: As long as capital remains abundant and hyperscalers continue their investments, the profit boom in the tech sector is likely to support stock markets. It is only when credit conditions tighten significantly and investments wane that today’s earnings enthusiasm may give way to the next major bubble. Until that point arrives, the music plays on—yet investors should remain vigilant and attentive to when it slows down.
