Wall Street Analysts Warn: U.S. Stocks Forming 'Double Bubble', Potential 30%-50% Crash if Burst

Currently, the U.S. stock market not only has a price bubble but also hides an earnings bubble.

Written by: Zhao Ying, Wall Street Insights

Driven by the AI boom, U.S. stocks have repeatedly hit new highs, but Wall Street analysts are issuing a rare warning— the risks facing the current market go far beyond just inflated stock prices.

Analysts Joachim Klement and Francisca Reis from Panmure Liberum pointed out in their latest report that the U.S. stock market is currently brewing both a "price bubble" and an "earnings bubble," creating a "double bubble" structure.

Using the cyclically adjusted Shiller price-to-earnings ratio (Shiller CAPE) as a benchmark and adjusting corporate earnings to long-term normal growth rates, the current valuation of the S&P 500 would reach 67.6 times, surpassing the peak of all asset bubbles in U.S. history. BCA Research's chief strategist Peter Berezin warned that once the bubble bursts, U.S. stocks could fall by 30% to 50%.

Despite this, the U.S. stock market has remained strong recently. As of Monday's close, the S&P 500 was less than 1% away from its all-time high, the Dow Jones Industrial Average surpassed 53,000 points to set a new record, and the Nasdaq Composite Index rose over 1%, with the semiconductor sector leading the gains again.

Distorted Forward P/E Ratio: Earnings Growth Expectations Far Exceed Historical Trends

Within the bullish camp, the forward price-to-earnings ratio (Forward P/E) is often cited as a basis for the stock market's reasonable valuation. According to Dow Jones market data, the forward P/E of the S&P 500 has dropped from 22.4 times a year ago to 20.51 times, even as the index has risen about 20% during that period. Behind this phenomenon is the fact that Wall Street's earnings growth expectations have outpaced the rise in stock prices themselves.

According to FactSet data, analysts currently expect the earnings growth rate of S&P 500 constituents in the second quarter to exceed 23%, marking the seventh consecutive quarter of double-digit earnings growth.

However, Klement and Reis pointed out that this earnings growth rate shows a significant divergence from long-term trends. The current earnings growth rate of the S&P 500 has exceeded the long-term trend by 1.8 standard deviations, indicating a "supernormal" level. They believe that if earnings growth were adjusted back to normal levels, the Shiller CAPE ratio would surge from the current approximately 41 times to 67.6 times, deviating from the long-term trend by 4.6 standard deviations, surpassing the peak of every asset bubble in U.S. history.

The Transformation of Mega Tech Companies: Normalization Pressure on Earnings Growth Becomes Apparent

Analysts point to the core risk of the current earnings bubble as being represented by "super-scale cloud computing companies" such as Microsoft, Alphabet, Amazon, Meta Platforms, and Oracle.

Klement warned in a column for the Financial Times that "supernormal" profits cannot last indefinitely. As these tech giants continue to invest heavily in AI data center construction, their business models are shifting from asset-light to asset-heavy, and this structural change will suppress earnings growth, gradually bringing it back to normal levels.

Klement also acknowledged that such high-growth earnings cycles often last longer than investors expect, and the current earnings momentum may still continue for several years.

Historical Precedent: Low P/E Ratios Once Concealed Earnings Bubbles

Peter Berezin of BCA Research cited historical cases to further explain the dangers of earnings bubbles. He pointed out that before the global financial crisis of 2007-2008, banks and home builders also experienced irrational profitability, and at that time, low P/E ratios concealed the unsustainability of profits.

"More generally, earnings bubbles are quite common in industries characterized by boom-bust cycles, including natural resources, aviation, shipping, and particularly noteworthy in the current environment, the semiconductor industry," Berezin wrote in a report at the end of May. In his third-quarter outlook released last week, he further pointed out that Wall Street analysts have performed poorly in judging the peaks of earnings bubbles, and once the bubble bursts, the stock market could fall by 30% to 50%.

Concerns over overly optimistic earnings expectations are not isolated. Andy Costan, CEO of Damped Spring Advisors, stated in May's "Monetary Matters" program that the growth rate of the U.S. economy is insufficient to support the earnings levels set by Wall Street analysts. Veteran Wall Street figure Jim Paulsen also recently expressed in a public statement that he believes the current market's excessive optimism regarding earnings poses a risk.

Meanwhile, the U.S. stock market experienced fluctuations in June, continuing into early July, with strong momentum trading centered around semiconductor stocks facing resistance. However, the semiconductor sector regained its upward momentum on Monday, driving the Nasdaq Composite Index up 1.1%, temporarily stabilizing market sentiment.

Disclaimer: This content is provided for general branding and informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online events, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets or to use any services. Crypto assets are highly volatile and may result in loss. WEEX services and online events may not be available in all regions and are subject to applicable laws, regulations, and eligibility requirements. You are responsible for ensuring that your use of WEEX services complies with local laws and for carefully assessing the risks before participating in any crypto-related activities.