Earnings, Not Just Valuations, Are Flashing Bubble Warnings: FT

The bubble debate is shifting. According to a Financial Times report, strategists argue the more pressing risk is not just stretched valuations, but that earnings expectations themselves may be running too hot to sustain.

The earnings bubble thesis

Market strategists increasingly argue the more important question is not whether there is a stock market bubble, but whether an earnings bubble is forming. The distinction matters because corporate profits have continued to exceed expectations, and earnings forecasts have risen sharply across sectors, helping justify higher valuations even as some investors warn current estimates may prove difficult to sustain.

Wall Street analysts are forecasting approximately 25% earnings growth for 2026 and nearly 18% growth for 2027, according to Bloomberg data. Several investors note the pace of upgrades is among the strongest since the post-pandemic recovery. Technology has led with earnings forecasts rising more than 30% this year, while communication services upgrades have exceeded 20%.

What the skeptics see

Ben Inker, co-head of asset allocation at GMO, said forecasts for the coming years have risen unusually quickly. Forecasts for next year’s profits have jumped almost 20% in just six months, the fastest rise since 2021. “What we are due for, in the market, is the eventual realisation that they will not come true,” Inker said.

Capital Economics also warned this week that AI-related equity markets may be approaching a point where earnings expectations and capital expenditure assumptions become difficult to sustain.

Not everyone is bearish. “We are in the middle of the strongest earnings upgrade cycle since the commodity supercycle,” said Arun Sai, senior multi-asset strategist at Pictet Asset Management, in the FT report.

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Valuations are still stretched too

The cyclically adjusted price-to-earnings ratio (CAPE), popularized by economist Robert Shiller, has climbed above 40 for the S&P 500. Panmure Liberum’s Joachim Klement argues today’s conditions differ from the dot-com bubble because leading AI companies generate substantial profits, but he warns investors may now be paying premium valuations on earnings that are themselves unusually elevated.

The Shiller CAPE’s long-term average is around 17, and it is extremely rare for the metric to surpass 40 for an extended period. The only time in history that happened was during the dot-com bubble, when it stayed above 40 consistently from January 1999 to September 2000. The dot-com bear market officially began in March 2000.

Why it matters for traders

The setup is different from 2000 in one important way: today’s leaders actually print cash. The risk is that consensus earnings estimates get marked down, not that multiples collapse in isolation. If the upgrade cycle stalls, the entire justification for elevated multiples softens at the same time.

Options market and stocks to watch

Earnings-bubble risk lands hardest on the names carrying the biggest forward growth assumptions:

• NVDA: watch for how forward guidance and hyperscaler capex commentary shape the AI earnings narrative.
• MSFT: watch for AI monetization progress against the capex ramp analysts are baking in.
• AMD: watch for whether data center growth keeps pace with the 30%+ tech earnings upgrades cited in the FT piece.
• SMH: watch this semi ETF as a proxy for the sector where earnings forecasts have moved fastest.
• SPY: watch for how index-level flows react to any downward EPS revisions given CAPE above 40.

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