US stock market's new earnings season begins, AI bull market faces its biggest test: can profits be realized?

Global stock markets continue to hit new highs driven by the AI narrative, but the core variables supporting this rally are undergoing subtle changes: Earnings expectations themselves are rising at an even faster pace.

Latest data shows that analysts expect S&P 500 company earnings to grow by about 25% over the next year, one of the fastest paces since the post-pandemic recovery. This upward revision is mainly driven by both a resilient economy and the wave of AI investment.

However, ahead of the upcoming second-quarter earnings season, concerns that "expectations may have outpaced reality too quickly" are also heating up. Some institutions point out that uncertainties related to AI capital expenditures, demand sustainability, and profit conversion efficiency could expose the current earnings path to downside risks.

Against this backdrop, the debate over whether the "AI bull market has entered an earnings verification phase" is shifting from valuation levels to the more fundamental issue of earnings deliverability.

Rapid Upward Revision of Earnings Expectations: Dual Drivers of AI and Economic Resilience

According to Bloomberg data, the current market consensus expects S&P 500 earnings to grow by about 25% over the next year, and over the past six months, forward annual earnings expectations have been revised up by nearly 20%, the largest such increase since 2021.

This round of upward revisions is concentrated in chip companies and "hyperscale cloud providers," with sustained growth in AI computing demand seen as a key driver. Analysts at Capital Economics note that the current AI-related stock market may be approaching a tipping point, where earnings expectations and capital expenditure assumptions become increasingly difficult to sustain over the long term, and any correction could trigger a broader market pullback.

Meanwhile, Michel Lerner, head of UBS's HOLT investment platform, stated that stocks in the AI supply chain are currently priced with the assumption of "abnormally high and sustained profits," but the probability of maintaining such profitability is "extremely low."

"Earnings Bubble" Debate Heats Up: Market Begins to Question the Path to Fulfillment

As earnings expectations rise rapidly, some investment institutions are beginning to warn of the formation of an "earnings bubble."

Ben Inker points out that the current pace of upward revisions to earnings expectations over the next two years is "historically extremely rare, with similar intensity only seen during post-crisis recovery phases," and believes that the market may ultimately face a reality check of "failing to deliver on these expectations."

On the other hand, Arun Sai, a strategist at Pictet Asset Management, argues that we are currently in the "strongest earnings revision cycle since the commodity super-cycle," suggesting that short-term fundamentals remain supportive.

But more cautious voices are emerging. Sarah Ketterer, CEO of Causeway Capital Management, points out that if stock prices already reflect peak earnings in the cycle, the current phase may not be an ideal entry point.

Valuation Appears Stable: Rising Earnings Expectations Offset High-Price Pressure

Despite the market continuously hitting new highs, valuation metrics have not spun out of control.

According to Bloomberg data, the S&P 500 currently trades at about 20 times forward 12-month earnings, significantly lower than last year's level and far below the peaks seen during the post-pandemic rebound of 2020 and the dot-com bubble. Analysts note that the rapid upward revision of earnings expectations has to some extent "offset" valuation pressure, allowing the index to reach new highs while overall valuation remains within a relatively manageable range.

However, this balance is highly dependent on earnings delivery. Once earnings expectations stop rising or even decline, valuation pressure could quickly become apparent.

Interest Rate Expectations and Financing Environment: Risk Shifts from Valuation to Funding Costs

In addition to earnings uncertainty, changes in funding costs are becoming another variable for the market. Traders currently expect at least one 25-basis-point rate hike in the U.S. this year, while earlier in the year, the market generally anticipated two to three rate cuts.

Against the backdrop of shifting rate expectations, the market is becoming more sensitive to corporate financing conditions. Some investors note that companies have recently accelerated equity and debt financing, including large deals and IPOs, reflecting a tug-of-war between capital market activity and changes in funding costs.

Kasper Elmgreen states that the market's "margin of safety is very limited," and the key question is whether earnings can continue to beat expectations and whether cracks have already appeared amid high expectations. As the second-quarter earnings season begins, the AI-driven earnings revision cycle will face its first systematic test.

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