Barclays Bets on Earnings as Wall Street Warns of an "Earnings Bubble"
Miles Bennett
Ahead of Q2 earnings season, Barclays calls profit growth the market's anchor, but GMO, Panmure Liberum and others warn that earnings expectations are rising at the fastest pace since 2021 — and that the S&P 500's CAPE ratio would balloon to 67.6× if profits normalise, signalling a brewing 'earnings bubble.'
Why is Barclays still bullish on earnings?
Barclays European equity strategist Emmanuel Cau argues that the Middle East situation should not trigger major portfolio shifts: "The key driver for equities remains corporate earnings growth."
He advises investors to diversify away from concentrated tech positions into sectors that benefit from rising capital expenditure — and to brace for volatility through the summer.
This means → Barclays' core thesis is simple: as long as earnings keep growing, the market has a floor. Profits are the single most important variable for the second half.
How strong do the earnings numbers look?
FactSet data shows S&P 500 companies are on track for a seventh consecutive quarter of double-digit profit growth, with analysts forecasting overall earnings growth above 23%.
The more striking figure is the pace of upgrades: GMO co-head of asset allocation Ben Inker notes that next-year earnings forecasts have been revised up nearly 20% in just six months — the biggest jump since 2021.
In plain terms = Wall Street is not just optimistic about profits — it is raising expectations at a speed normally seen only in post-crisis recoveries, and that speed itself becomes a source of risk.
How expensive is the market really?
Panmure Liberum's latest report flags that the S&P 500's cyclically adjusted price-to-earnings ratio — the CAPE, which smooths earnings over a decade to gauge whether stocks are cheap or dear — has reached roughly 41×, nearing the dot-com-era peak of 25 years ago.
If corporate earnings are adjusted back to a normal growth rate, that ratio would surge to 67.6×, sitting 4.6 standard deviations above the long-run average — beyond any prior peak in the history of US asset bubbles.
This means → today's stock prices have fully priced in the assumption that extraordinary profits last forever. If earnings normalise, valuations look extreme.
What exactly does the 'earnings bubble' warning mean?
Capital Economics warns that AI-linked equities may be nearing a tipping point where earnings expectations and capex assumptions become unsustainable — and a correction there could trigger a broad market sell-off.
UBS HOLT head Michelle Lerner is blunt: "AI stocks are priced to sustain abnormal profits" — the market is forming an "earnings bubble."
Panmure Liberum chief investment strategist Joachim Klement adds that as tech giants shift from asset-light to asset-heavy spending on AI data centres, an earnings-growth normalisation is "already the most likely outcome" — though he concedes such rallies can persist longer than expected.
What does the worst-case scenario look like?
BCA Research chief strategist Peter Berezin draws a direct parallel to banks and homebuilders on the eve of the 2007–08 financial crisis, calling today's inflated earnings growth "deeply deceptive for investors."
His warning: once semiconductors and other boom-bust-cycle sectors peak and trigger a bubble unwind, the broad US market could fall 30% to 50%.
This reflects a deeper fear: the market is not unaware that earnings expectations are stretched — it is simply betting the music won't stop. History suggests how that bet usually ends.
What should investors watch this earnings season?
Goldman Sachs asset-allocation research head Christian Mueller-Glissmann cautions that last quarter's AI-driven earnings surprises lifted stocks sharply, but "the bar for this earnings season is materially higher."
His judgment: "The wave of large-scale earnings surprises tied to AI capex is most likely nearing its end" — corporate results alone are unlikely to spark another major rally.
Put simply = last quarter's "beats" raised the standard. Even solid numbers this time may not impress — the core tension has shifted from "are companies making money?" to "are expectations already too high?"
Content is for reference only, not financial advice.