Bank of America: The market expects AI adoption to be like China's accession to the WTO, with global corporate profits already "detached from fundamentals"

Mars Finance News: On May 30, Bank of America Securities’ latest report said that the corporate earnings expectations behind fresh highs across global stock markets have shown an unusual divergence from traditional macro fundamentals. The MSCI Global Index’s 12-month forward EPS has risen 9% over the past three months, nearly 40% on an annualized basis. S&P 500 three-month EPS momentum has climbed to 12%, a 40-year high. However, global PMI has kept sliding to about 50.5, a two-year low. More importantly, around two-thirds of this round of earnings upgrades comes from an expansion in profit margin expectations: European and global 12-month forward consensus profit margins have risen to historical peaks of 13.9% and 11.4%, respectively.

Bank of America likened this atypical pattern to China’s accession to the WTO in 2001. At that time, more than 1 billion workers entering the global economy weakened the bargaining power of workers in developed countries, pushing the share of corporate after-tax profits in GDP from 5%-8% to 10%-12%. Today, the market is betting that the large-scale deployment of AI tools will similarly hit white-collar bargaining power, leading to a structural jump in corporate profit margins—even in an environment where there is a lack of macro acceleration.

In its report, Bank of America cited five major risks that the market is underestimating: a macro downturn; an endogenous contraction in demand triggered by AI substitution; the annualized cost of large-model tokens having doubled year-to-date; productivity improvements that may take 10 years instead of being realized immediately; and the possibility that large-scale white-collar unemployment could trigger a political backlash and pressure for windfall profit taxes. The market is currently overpricing an almost ideal scenario—“demand without worries, profit margins at record highs.” If a macro downturn and widening risk premiums do materialize, the current earnings-driven logic will face a twofold test: downward revisions to profit margin expectations and valuation compression.