TechFlow News, May 30: BofA Securities, in its latest research report, points out that behind the global equity markets’ continued record highs lies a rare divergence—observed in recent years—between corporate earnings expectations and macroeconomic fundamentals.
Data show that the MSCI World Index’s 12-month forward earnings per share (EPS) estimate has risen approximately 9% over the past three months, implying an annualized growth rate of nearly 40%; meanwhile, the S&P 500’s three-month earnings momentum has surged to 12%, reaching the highest level in nearly 40 years. At the same time, however, the global Purchasing Managers’ Index (PMI) has continued declining to around 50.5—the lowest level in roughly two years.
BofA notes that roughly two-thirds of the current upward revision in earnings expectations stems from margin expansion—not revenue growth. Forward 12-month expected profit margins for Europe and global markets have now reached 13.9% and 11.4%, respectively—both at historical highs.
The report draws an analogy between today’s market logic and China’s accession to the WTO in 2001. Back then, the integration of a vast labor force into the global economy significantly raised corporate profits’ share of GDP. Today, markets are betting that large-scale AI adoption will weaken white-collar workers’ bargaining power, thereby ushering in a new structural upcycle for corporate margins.
Nonetheless, BofA also identifies five key risks: a global economic slowdown; AI-driven job displacement leading to demand contraction; rising inference costs for large language models; productivity gains falling short of expectations; and potential regulatory and political backlash triggered by large-scale unemployment.
The report argues that markets are currently pricing in an “ideal scenario” wherein demand remains robust and profit margins continue hitting new highs. Should the macroeconomic environment deteriorate or risk premiums rise, both corporate earnings expectations and valuation levels could face downward revisions.
