Strong earnings results have sent stocks to fresh record highs, but it’s also fueling an emerging market bubble, one veteran strategist says.
Wall Street is facing an AI bubble, but it looks different from what investors typically expect, Peter Berezin, BCA Research’s chief strategist said, explaining the latest bubble is being driven by earnings rather than valuations.
“The AI bubble is a different type of bubble. It is primarily an earnings bubble rather than a valuation bubble,” he wrote in a BCA note titled, “Earnings Bubbles Are Still Bubbles.”
The S&P 500 has notched a strong of record highs and has gained double digits since the start of 2026, despite headwinds like the Iran war.
Some on Wall Street have drawn comparisons between today’s market and the dot-com bubble, where an unsustainable rise in stock prices outpaced earnings growth.
Unlike the dot-com era, BCA said today’s AI bubble is driven by unsustainable earnings growth.
Earnings bubbles through history
As the old adage goes, history often rhymes, and BCA called out some historic parallels to today’s market landscape.
Berezin flagged the stock moves in the lead up to the Great Financial Crisis as an example of an earnings-driven bubble. “Their P/E ratios remained low, disguised by an unsustainable increase in profits,” he noted.
A more recent instance of an earnings bubble burst was the work-from-home beneficiaries in 2020 and 2021.
Earnings bubble are more common in industries that see boom and bust cycles. “These industries include natural resources, airlines, shippers, and importantly for today’s environment, semiconductors,” the strategist said.
Understanding today’s AI bubble
First-quarter earnings results astounded Wall Street, with the AI trade revived by a string of stellar results. BCA noted that supply-demand imbalances are among the main factors propping up earnings. A major example has been in the memory-stock trade, which has exploded this year as AI drives up demand for memory storage in the latest phase of AI development.
“Shortages lead to higher prices, which in turn lead to fatter profit margins. Higher profits incentivize investment in new capacity. Supply eventually catches up to demand, causing prices and profits to plunge.”
Big Tech companies are spending billions on AI, and the infrastructure buildout is driving huge demand for hardware. Shortage-driven profits are ultimately driving stocks to new all-time highs.
“This has resulted in a paradoxical situation: Aggregate free cash flow among the hyperscalers is crashing and could turn negative in 2027. Yet, reported profits are going through the roof.”
BCA warned that another factor for investors to consider the expected depreciation in value of what Big Tech is currently pouring money into.
When the AI bubble will burst
The strategist sounded the alarm that Wall Street is in the midst of an AI bubble, but that doesn’t mean it’s about to pop.
“Like all bubbles, the AI bubble will burst. For now, however, our AI demand indicators do not suggest that this is imminent,” the note read.
However, BCA still sounded a warning for the market.
“Earnings bubbles can be more toxic for the economy than valuation bubbles if they leave an overhang of excess capacity in their wake.”
In the case of the AI trade, that means that if the tech isn’t as widely adopted as expected, massive AI spending will have a negative ripple effect on the broader economy.
Another challenge of an earnings bubble compared to a typical valuation bubble, is that analysts don’t start cutting profit estimates until after stocks decline, BCA said.