Wall Street institutions warn that the U.S. stock market faces a "double bubble" crisis: Beware of inflated corporate profits triggering sharp market volatility

Source: Global Markets Broadcast

Several Wall Street analysts and investment strategists have issued warnings that the current U.S. stock market faces not only a pricing-level asset bubble but also a "profit bubble" in corporate earnings fueled by the artificial intelligence (AI) boom. Experts point out that this "double bubble" structure is highly unsustainable, and once the bubbles burst, the U.S. stock market could experience a sharp correction ranging from 30% to 50%.

Recently, directly driven by the surge in AI-themed stocks, major U.S. indexes such as the S&P 500 have once again hit record highs. In response to bullish commentators' claims that "the forward P/E ratio is decreasing, indicating U.S. stocks remain attractive," several research institutions have pointed out that the nominal decline in P/E ratios is not due to reasonable valuations, but rather the result of Wall Street analysts sharply raising their expectations for corporate earnings per share over the next 12 months at an abnormal rate. According to data research firm FactSet, S&P 500 component companies are expected to achieve double-digit profit growth for the seventh consecutive quarter.

However, this high growth trend has seriously deviated from the long-term logic supported by the real economy. In a newly released report, British investment bank Panmure Liberum noted that the S&P 500’s cyclically adjusted price-to-earnings ratio (Shiller CAPE) is currently about 41, approaching the historical peak seen during the dot-com bubble 25 years ago. More critically, current earnings per share growth rates for U.S. listed companies have deviated from the long-term trend by 1.8 standard deviations. The institution notes that if corporate profit growth were normalized, the S&P 500's cyclically adjusted P/E would actually surge to 67.6, deviating from the long-term average by an astonishing 4.6 standard deviations, completely surpassing any peak in the history of U.S. asset bubbles. Panmure Liberum’s Chief Investment Strategist Joachim Klement emphasized that such “extraordinary” profit windfalls cannot last forever. As major tech giants shift from asset-light to asset-heavy models by making massive capital investments in AI data centers and other areas, a return to normalized profit growth rates is very likely.

Peter Berezin, Chief Strategist at independent macroeconomic research firm BCA Research, noted that this inflated profit growth is highly deceptive for investors. Ahead of the 2007–2008 global financial crisis, the banking and residential construction sectors also experienced similar “earnings bubbles.” Berezin stated that it is typically very difficult for Wall Street analysts to predict the peak of profit bubbles, but historical experience shows that once industries with cyclical boom-bust patterns, such as semiconductors, peak and burst, the broader U.S. stock market can fall by as much as 30% to 50%.

In addition, industry insiders such as Andy Costan, CEO of macroeconomic consulting firm Damped Spring Advisors, and veteran Wall Street investment expert Jim Paulsen have recently expressed concerns about the current overly optimistic profit expectations. They point out that the current U.S. macroeconomic growth rate is simply unable to support the aggressive corporate profit outlooks presented by Wall Street analysts. Although the three major U.S. stock indexes once again closed higher on Monday—with the Dow Jones Industrial Average closing above 53,000 for the first time—analysts reiterated that the broad fluctuations in heavyweight stocks like semiconductors since June have already sounded the alarm that market momentum may have reached a short-term peak.