S&P 500 Profit Forecast to Surge 25%...Warning: 'Wall Street Earnings Bubble Will Burst'

▲ US Stock Market, S&P 500, Bullish/AI-generated image

While Wall Street is shouting about 25% earnings growth for S&P 500 companies, strategists have issued a 'performance bubble' warning. With profit forecasts soaring by nearly 20% in just six months, concerns are spreading that the very numbers supporting the record stock market rally could be shaky.

According to crypto-specialized media BeInCrypto on July 6 (local time), Wall Street analysts projected that S&P 500 corporate earnings would increase by 25% over the next year. Market earnings forecasts have surged by nearly 20% in the last six months. This is the steepest six-month increase since 2021.

Ben Inker, co-head of asset allocation at GMO, pointed out that earnings forecasts for the next two years are "rising at an excessively rapid pace, unlike anything seen outside of crisis recovery periods." He predicted that the market would eventually realize that current forecasts might not materialize.

At the heart of the warning are AI-related stocks. Michel Lerner, head of UBS HOLT's analytics platform, warned that an "earnings bubble" is forming in the market. Lerner stated that AI-related stocks reflect expectations that they will continue to maintain abnormally high profits, and he assessed that the likelihood of sustaining current levels of profitability and growth is very low.

The S&P 500 index has risen by 20% over the past year, and the Nasdaq Composite index has climbed by more than 25%. The Nasdaq also recorded its highest quarterly gain in six years. While the forward price-to-earnings ratio for stocks is around 20 times, lower than during the dot-com bubble and last year's rally, rapidly elevated earnings forecasts are suppressing valuation increases.

Kasper Elmgreen, Chief Investment Officer for Fixed Income and Equities at Nordea Asset Management, pointed out that the safety margin for corporate earnings forecasts is very thin ahead of the Q2 earnings season. The market is also pricing in at least one 0.25 percentage point interest rate hike by year-end. With previous expectations for multiple rate cuts now reversed, whether Wall Street's high earnings expectations will translate into actual results has emerged as a key issue.

[Article Summary]

-The projected earnings growth rate for S&P 500 companies over the next year is 25%, and earnings forecasts have jumped by nearly 20% in the last six months.

-Strategists at GMO and UBS have warned of an 'earnings bubble,' citing rapidly rising earnings forecasts and high profit expectations for AI-related stocks.

-With at least one 0.25 percentage point interest rate hike by year-end now factored in, whether Q2 earnings will meet Wall Street's expectations is drawing attention.

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