Earnings bubble ?

Are we in a stock market bubble? Perhaps an earnings bubble rather than a valuation bubble.

Since October 2022, the S&P 500 has gained more than 110%. Interestingly, most of this performance has come from earnings growth, not multiple expansion. Earnings have done the heavy lifting.

But there is a catch. The S&P 500 has rarely been so concentrated, with a handful of stocks accounting for a disproportionate share of market returns.

What could go wrong? AI investments fail to generate the expected profits, higher interest rates put pressure on valuations and financing costs, or weakening consumer confidence starts hurting corporate margins.

The real risk may therefore not be excessive valuations alone, but excessive confidence in future earnings, particularly those of a few technology giants.

For a value investor, the distinction matters. The market is pricing in continued earnings growth. But how much of that growth is sustainable?

An earnings bubble can be just as dangerous as a valuation bubble.