Bank of America: Market Hoping for AI Popularization Similar to China Joining WTO, Global Corporate Earnings Have "Decoupled from Fundamentals"

May 30. Bank of America Securities’ latest research note notes that the unusual disconnect between global stock markets hitting all-time highs and traditional macroeconomic fundamentals stems entirely from corporate profit forecasts. The MSCI Global Index’s 12-month forward earnings per share (EPS) has climbed 9% over the past three months, translating to an annualized growth rate of nearly 40%. The S&P 500’s three-month EPS momentum has jumped to 12%—its highest level in four decades. Yet, the global Purchasing Managers’ Index (PMI) has kept falling to a two-year low of roughly 50.5. Even more crucially, roughly two-thirds of this latest round of earnings upgrades are tied to rising profit margin forecasts, with forward 12-month consensus profit margins hitting all-time highs of 13.9% in Europe and 11.4% globally, respectively. Bank of America frames this gap as analogous to China’s 2001 WTO accession: at that time, over a billion workers joined the global economy, crimping the bargaining power of workers in advanced nations and pushing corporate after-tax profits as a share of GDP from 5%–8% to 10%–12%. Today, investors are betting that the widespread rollout of AI tools will do the same to white-collar workers’ bargaining power, sparking a structural surge in corporate profit margins—even amid a lack of macroeconomic acceleration. The bank flags five key risks the market is underpricing in the report: macro downside risks, AI-induced contraction in domestic demand, the doubling of large-scale token usage costs since the start of the year, productivity gains that could take a decade to materialize rather than popping up quickly, and the risk of widespread white-collar job losses spurring political backlash and windfall tax pressures. Right now, markets are pricing in a near-perfect scenario: unshakable demand paired with record profit margins. Should a macro downturn and wider risk premiums come to pass, the current profit-focused logic will face a double hit: downward revisions to profit margin forecasts and valuation compression.