With stocks hovering near records despite Friday’s sell-off and banks set to kick off earnings season next week, Wall Street is looking for follow-through from what’s been a stellar AI-driven year.
The S&P 500 (^GSPC) has rallied more than 30%, or about 1,800 points, since the April lows, while the Nasdaq Composite is up roughly 50% over the same period in what has turned out to be a stunning six-month rally.
Wall Street expects S&P 500 third quarter earnings to rise 8% from the same period last year, which would mark the ninth straight quarter of profit gains, according to FactSet data.
Tech companies are guiding earnings higher this season more than any other sector, led by software and semiconductor firms issuing the bulk of those positive outlooks.
The latest blockbuster tie-up between ChatGPT maker OpenAI (OPAI.PVT) and chipmaker AMD (AMD) has revived questions about whether the market is in an outright bubble.
“Valuations are high, so it’s warranted to take a little closer look into that,” Lisa Schreiber, investment analyst at Gradient Investments, told Yahoo Finance last week.
“I don’t think we are in a bubble because we have fundamentals. These companies keep crushing their earnings quarter after quarter.”
The S&P 500 is trading at about 25 times expected earnings for this year, a level that “reflects complete confidence (and then some)” that profits will meet expectations, wrote DataTrek Research co-founder Nicholas Colas in a recent note.
Goldman Sachs analysts said last week that the market isn’t in a bubble yet, noting “the leading companies that have seen the strongest returns have unusually strong balance sheets.”
Meanwhile, UBS analysts expect global capital expenditures on AI to grow 67% year over year in 2025.
“In our view, the rally remains underpinned by solid fundamentals, accelerating adoption, and a still-favorable macro environment,” wrote UBS strategists on Thursday. “Investors should consider phasing in allocations on any market dips.”
But so far, there have been few dips to buy.
The cornerstone sectors of the AI boom, which include Tech (XLK), Communications Services (XLC), Utilities (XLU), and Industrials (XLI), have been sitting near all-time highs. And Wall Street strategists keep lifting their S&P 500 price targets.
Still, not everyone is convinced.
“As we look at it, the US market continues to be overvalued, and it’s been overvalued for a long time,” Jim Masturzo, Research Affiliates chief investment officer of multi-asset strategies, told Yahoo Finance.
