Exuberance over earnings is becoming a problem for the stock market, according to this Wall Street veteran
Amid all the recent angst and churn within the stock market — with investors questioning valuations in some pockets of the AI business —most analysts have remained optimistic about equities for the rest of the year.
Many have picked the irresistible round number of 8,000 as their S&P 500 SPX target for the end of 2026, powered, they believe, by continued strong earnings growth.
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Indeed, just this week JPMorgan strategists — who are cautious by comparison, with an S&P 500 target of 7,800 — described average forecast earnings growth of around 20% for 2026 and 2027 as “unprecedented.”
Jim Paulsen sees danger in such earnings exuberance. In his Paulsen Perspectives blog, the Wall Street veteran has in recent days highlighted a number of issues that make him wary of the stock market’s prospects.
These include lagged damage done to equities from an energy-price spike; a looming relatively tighter fiscal and monetary backdrop; evidence of heightened speculative behavior; and a defensive composition of the S&P 500 that’s near a record low.
With regard to corporate profits, Paulsen notes: “Recent S&P 500 earnings per share momentum has been about as strong as any time since at least 1990. As is evident today, great earnings usually make for happy investors.”
This was clearly shown on Thursday, for example, when Micron Technology’s stock MU surged 15.7% after the memory-storage company delivered blowout results and guidance.
But he adds that, as the chart below shows, “strong EPS momentum has historically been good for stock prices … ‘until it hasn’t.’ “
Earnings growth looked great in March 2000, but that marked the top of the dot-com bubble. This was also the case in October 2007 and in early 2022, just before the onset of significant bear-market declines, Paulsen observes.
A reason for this is that, unlike trailing 12-month reported EPS, forward 12-month estimated earnings — which is what most investors tend to rely upon — is at least partially a “sentiment indicator,” according to Paulsen.
And that’s important, in his view. “Often near the end of bull market cycles, estimated EPS are typically strong, perhaps saying more about exuberant investment sentiment (as implied by optimistic EPS estimates) than about sustainable fundamentals.”
