Strong earnings results have propelled stocks to new record highs, but some experts caution that this surge is also indicative of an emerging market bubble. Peter Berezin, chief strategist at BCA Research, asserts that Wall Street is currently experiencing an AI bubble, distinguished by its reliance on earnings rather than traditional valuations.
In a note titled “Earnings Bubbles Are Still Bubbles,” Berezin emphasized that the current AI bubble resembles an earnings-driven phenomenon rather than a conventional valuation bubble. He highlighted that the S&P 500 has consistently achieved record highs, climbing double digits since the start of 2026, even amidst geopolitical tensions, such as the ongoing conflict in Iran.
Some observers have drawn parallels between today’s market dynamics and the notorious dot-com bubble, where stock prices soared unsustainably, outpacing genuine earnings growth. Unlike that era, however, Berezin argues that the current AI bubble is characterized by a rapid but unsustainable increase in earnings.
To illustrate this concept, he pointed to historical instances of earnings bubbles. Notably, he referenced stock movements leading up to the Great Financial Crisis, where low price-to-earnings (P/E) ratios masked unsustainable profit surges. A more recent example was seen in the boom surrounding remote work during 2020 and 2021, where certain companies experienced inflated earnings that eventually corrected.
Earnings bubbles tend to emerge in industries with inherent boom-and-bust cycles. Berezin specifically mentioned sectors like natural resources, airlines, shipping, and notably semiconductors, which is highly relevant to today’s environment.
In the first quarter of this year, remarkable earnings results reignited interest in AI investments, largely fueled by supply-demand imbalances that bolster earnings. A key example arises from the memory-storage market, which has seen a surge in demand alongside the growth of AI, leading to higher prices and, consequently, increased profit margins. This cycle of shortages driving up prices incentivizes further investments, eventually resulting in an oversupply that can dramatically impact profitability.
Despite the current stock market’s ascent, a paradox exists: while aggregate free cash flow among major tech companies—often referred to as hyperscalers—is declining and may even turn negative by 2027, reported profits are soaring. Berezin raised concerns about the potential long-term implications of this disconnect, warning that significant investments in AI could lead to depreciated assets if the technology does not achieve its anticipated adoption rates.
While Berezin acknowledged that the AI bubble is likely to burst eventually, he reassured that current demand indicators do not suggest an immediate fallout. However, he underscored that earnings bubbles can be particularly detrimental to the economy, leaving excess capacity in their wake.
He cautioned that if the anticipated widespread adoption of AI does not materialize, the large-scale investments in technology could generate negative ripple effects throughout the broader economy. Additionally, the nature of earnings bubbles may delay the reaction of analysts, who typically begin revising profit estimates only after stock declines become apparent.
