The new financial season for U.S. stocks begins, and the AI bull market faces its biggest test: Can profits be realized?

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Global stock markets have continued to reach new highs, driven by the AI narrative, but the core variables supporting this round of gains are subtly changing: earnings expectations themselves are now rising at a faster pace.

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

But as the second quarter earnings season approaches, the market’s concern over whether “expectations are outpacing reality too quickly” is increasing. Some institutions point out that uncertainty in AI-related capital expenditures, the continuity of demand, and the efficiency of profit conversion may pose risks to the current earnings trajectory.

Against this backdrop, the debate over whether the “AI bull market has entered the earnings verification stage” is shifting from valuation to the more fundamental ability to deliver profits.

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

According to Bloomberg data, consensus expectations are for S&P 500 earnings to grow about 25% over the next year, and over the past six months, future annual earnings expectations have already been revised up nearly 20%, the largest increase since 2021.

This round of upward revisions is mainly concentrated on chip companies and “hyperscale cloud vendors,” with surging demand for AI computational power seen as the key driver. Capital Economics analysts point out that the current market for AI-related stocks may be approaching a critical point, where earnings expectations and capital expenditure assumptions become difficult to sustain long-term; any correction might trigger broader market pullbacks.

Meanwhile, Michel Lerner, head of UBS’s HOLT investment platform, says AI industry chain stocks are currently priced with the implicit assumption of “long-term sustained super profits,” but the probability of maintaining such profitability is “extremely low.”

“Earnings Bubble” Debate Heats Up: Market Begins to Question Realization Path

As earnings expectations quickly rise, some investment institutions are now cautious about the formation of an “earnings bubble.”

Ben Inker points out that the pace of upward earnings revisions for the next two years is “extremely rare in history, only seen in post-crisis recovery periods of similar intensity,” and he believes the market may ultimately face a reality check where these expectations cannot be fulfilled.

On the other hand, Pictet Asset Management strategist Arun Sai believes the current phase is “the strongest earnings revision cycle since the commodities supercycle,” indicating short-term fundamentals remain supportive.

But more cautious voices are increasing. Causeway Capital Management CEO Sarah Ketterer points out that if stock prices are reflecting earnings cycle peaks, the current phase may not be the ideal window for allocation.

Valuations Appear Stable: Earnings Upward Revisions Offset Pressure at High Levels

Despite ongoing market highs, valuation indicators have not spun out of control.

According to Bloomberg data, the S&P 500 is currently trading at around 20 times next year’s earnings, noticeably lower than last year, and much lower than the valuation peaks during the 2020 pandemic rebound and the Internet bubble. Analysts note that rapid revisions of earnings expectations have “offset” some valuation pressures, allowing the index to reach new highs while keeping overall valuations under relative control.

However, this balance is highly dependent on earnings realization. If earnings expectations stop being revised up or decline, valuation pressure could quickly become apparent.

Interest Rate Expectations and Financing Environment: Risks Shift from Valuation to Cost of Capital

Aside from uncertainty on the earnings side, changes in the cost of capital are becoming another variable the market is watching. Traders currently expect at least one 25-basis points rate hike in the U.S. this year, while at the start of the year, the market widely anticipated two to three rate cuts.

Amid adjusted interest rate expectations, the market’s sensitivity to corporate financing environments has increased. Some investors point out that companies have recently accelerated equity and debt financing, including major deals and IPO cases, reflecting the game between capital market activity and changes in the cost of capital.

Kasper Elmgreen says the market’s “margin of safety is very limited” at present, and the key issue is whether earnings can continue to exceed expectations and whether potential cracks have already emerged in the high-expectation environment. As Q2 earnings season begins, the cycle of AI-driven earnings revisions will be systematically tested for the first time.

Risk Warning and DisclaimerThe market involves risks; investment requires caution. This article does not constitute personal investment advice and does not take into account the particular investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions herein fit their specific situations. Investments based on this, responsibility is borne by the user. ```