Published May 29, 2026
We found the article below from Bank of America’s equity research team to have an interesting perspective on the market’s AI mania of late.
“The artificial intelligence-fueled rally is often compared with other capital expenditure-led build-outs, like that of the internet during the dot-com bubble.
Bank of America’s European equity strategists accept that this may be the case; but also make a different comparison.
“The story of high profit expectations is not just a tech story, with global 12-month consensus margins excluding tech also hitting a fresh high of 12%,” said strategists led by Sebastian Raedler.
“One plausible interpretation is that the market is pricing a broad step-up in corporate profitability in response to the accelerating AI rollout, similar to what happened when China entered the World Trade Organization in 2001.”
Back then, the entry of more than 1 billion Chinese workers into the global economy reduced the wage share of gross domestic product — typically between 61% and 65% — to a lower range between 57% and 60%. Similarly, the corporate-profit share of GDP rose to between 10% and 12%, from 5% to 8%.
The chart below shows how the expectations for upcoming earnings (light blue line) have surged upward, far outpacing (for now) the growth expectations for the global economy overall. Of course, a modest notch higher in sales can create a boom in profits when profit margins are also expanding (as they are for semiconductors now).
Earnings expectations are running far ahead of their traditional relationship to PMIs.
The Bank of America strategists noted that, in both the U.S. and Europe, earnings expectations for S&P 500 and Stoxx 600 (European) companies have moved well ahead of their traditional relationship with the global economy, as shown in purchasing-manager indexes. Given this divorce from the underlying economy, much has to go right for what they call a “golden age of corporate profitability” to materialize.
“In shifting margin expectations to an even higher level now without the support of a clear-cut acceleration in global growth momentum, markets appear to be pricing in a scenario in which the rollout of AI tools could lead to a further structural increase in corporate productivity and profitability by allowing corporates to replace human capital with cheaper AI bots,” they said.
The alternative argument about the AI build-out is buttressed by the fact that capital expenditure isn’t immediately reflected in profit and losses.
“Capital spending filters through the balance sheet instead — and will show up on the P&L only slowly over time in the form of higher depreciation charges,” they noted.
“This pattern of initially elevated margins at the start of an investment boom – driven by scarce capacity and strong demand – followed by booming investment, rising supply, then a subsequent squeeze on pricing power and returns as depreciation catches up, arguably explains the boom-and-bust dynamics of many investment cycles in the past (including the railroad boom of the 1880s, the radio boom of the 1920s and the tech boom of the 1990s).”
Even without depreciation, the strategists flagged other risks. A slow re-opening of the Strait of Hormuz could force demand destruction, and some AI scenarios could hit profits.
AI could curtail demand through labor-market weakness. The expense of AI and surging token costs could slow adoption. Or simply, AI may not boost productivity much. A further risk comes from the political reaction to AI, already in evidence in the fight over data centers, which could lead to windfall taxes.”
Market Update
Returning from Memorial Day, traders bid up shares of memory chipmaker Micron +19% to send the company above a $1Trillion valuation, only the 12th U.S. company to achieve that level. The company’s value has vaulted 10x in only a few months as AI-driven demand for memory dramatically outpaces supply. This is not a startup success story. Micron has been a leader in memory chips for decades. This sudden vertical move in its value speaks to the overwhelming demand for hardware to run an insatiable AI. Stocks closed Tuesday +0.6% with investors ignoring a few military strikes as the U.S. and Iran seek ways to find at least a ceasefire agreement. A flat trading day Wednesday found oil prices continuing to retreat over ceasefire optimism. Another memory chip company, South Korea’s SK Hynix, joined Micron in the Trillion Dollar Club Wednesday. Thursday saw a number of consumer retail companies issuing better than expected earnings reports while software company Snowflake signed a massive AI deal with Amazon. That send stocks upward another +0.6% with investors once more overlooking economic reports that would otherwise be cause for worry. An April inflation report showed prices ticking higher while first quarter GDP was revised notably lower. AI stocks ripped higher Friday on stunning reports from computer maker Dell and a series of positive reports from enterprise software providers. The move in software is particularly important for this rally. The group was the source of tremendous concern over the past six months. Investors feared that AI applications would replace existing software applications rendering some of the sector’s existing products all but obsolete. That concern in turn hit companies financing software forays into AI, sending shares of investment bankers and private equity firms sharply lower over the prior months. Investors are now changing their tune on that idea and seeing that AI can benefit software as well. This week’s news from software makers Okta, Salesforce and Snowflake sent software and finance company share prices strongly upward Friday. On the hardware side, Dell can’t make servers fast enough to feed the AI data center demand. The company’s shares zoomed +32% higher in Friday’s trading. Shares have risen over 3x in only two months’ time.
AI continues to support stocks with the S&P 500 making it a nine consecutive weekly advance. This week the index added +1.45%. The Nasdaq 100 (QQQ) rose +2.89%. Small cap stocks added +1.89% as interest rates fell back along with oil prices.
Warm wishes and until next week.