US Stocks Face 'Double Bubble' Risk, Warn Wall Street Analysts

U.S. stocks are nearing historic highs, fueled by the artificial intelligence boom. However, Wall Street analysts are sounding the alarm about a "double bubble" in the market, comprising both a price bubble and a profit bubble. If corporate profits are adjusted to their historical growth rates, the S&P 500's valuation could soar to a price-to-earnings ratio of 67.6, surpassing all previous asset bubbles in U.S. history. The analysts caution that if this bubble bursts, the stock market could plummet by 30% to 50%.

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current U.S. stocks not only have a 'price bubble' but also hide a 'profit bubble.'

According to a report by Panmure Liberum analysts Joachim Klement and Francisca Reis, the U.S. stock market is currently brewing a "double bubble" structure. Measured by the cyclically adjusted Shiller price-to-earnings ratio (CAPE), the S&P 500 is valued at approximately 41 times. However, if corporate profits are revised to their long-term normal growth trend, the Shiller CAPE would climb to 67.6, which is 4.6 standard deviations above historical trends and exceeds the peaks of past U.S. asset bubbles.

Investors have recently cited falling forward price-to-earnings ratios as evidence of reasonable U.S. stock valuations. The S&P 500's forward P/E ratio has decreased from 22.4 a year ago to 20.51, despite a roughly 20% increase in the index during the same period. This is not because stocks have become cheaper, but rather because Wall Street's profit forecasts have been revised upward faster than stock prices have risen.

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If corporate profits are adjusted to their historical normal growth, the S&P 500's valuation will soar to 67.6 times P/E, surpassing the peak of all asset bubbles in U.S. history.

Data from FactSet shows that market expectations predict a 23.3% year-over-year increase in earnings for S&P 500 companies in the second quarter of 2026. However, Klement and Reis argue that the current earnings per share growth for the S&P 500 is already 1.8 standard deviations above the long-term trend, an abnormally high level. If corporate profits cannot continue to exceed historical trends, the low P/E ratios investors currently rely on may prove misleading.

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If the bubble bursts, the stock market could plummet by 30%-50%.

Analysts point to major cloud computing companies like Microsoft, Alphabet, Amazon, Meta, and Oracle as primary risks. These companies historically operated with less capital-intensive, high-margin business models. However, with the ongoing expansion of AI data center investments, their capital expenditures and depreciation costs are increasing, gradually shifting their business models toward being more capital-intensive. This could lead to a return to normal profit growth rates in the future. BCA Research analyst Peter Berezin notes that profit bubbles are not uncommon in cyclical industries such as natural resources, aviation, shipping, and semiconductors. Before the 2007-2008 financial crisis, banks and homebuilders also experienced profits at their peak, making P/E ratios appear low and masking the risk of unsustainable profits. He warns that Wall Street analysts have historically performed poorly in identifying the peak of profit bubbles, and if the AI profit bubble eventually bursts, U.S. stocks could fall by 30% to 50%.

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the current U.S. stock market is brewing a 'double bubble' structure.