Equities Peak? Analyst Warns of Poor Setup

Equities might experience a final push higher before the year concludes, according to BCA Research's chief economist, Peter Berezin. However, he expressed significant concern about the outlook beyond this period, indicating that current market valuations may already reflect excessive optimism. Analysts are anticipating record earnings growth and profit margins, a scenario Berezin finds unsustainable long-term.

A key factor driving this caution is the massive scale of investment in artificial intelligence. BCA Research estimates that AI firms could require generating as much as $10 trillion in annual revenue to validate the capital currently being invested in data centers. This figure is comparable to global annual expenditures on essential sectors like food or healthcare.

Currently, acute shortages in AI hardware are providing a tailwind for the stock market. Nevertheless, BCA Research foresees downside risks for equities within a 12-month timeframe, though they deem it premature to prepare for a full-blown bear market. Berezin noted that U.S. productivity growth remains close to its 10-year average, lacking strong evidence of the accelerated growth that would bolster a more bullish structural outlook.

On interest rates, uncertainty around the Federal Reserve's reaction function has pushed bond yields higher, with little expectation of a significant decrease given a tightening labor market. Additionally, Berezin highlighted that falling oil prices, partly driven by rising crack spreads that curb crude demand, are an unencouraging indicator for the global economy.