The S&P 500 (SPX) is currently priced for 15-20% earnings growth over the next year, far above the roughly 7% historical average. That optimism is anchored in an AI investment surge and expectations of Trump-style deregulation, while PMI commentary points to real growth running above about 4%.
AI-linked leaders such as NVIDIA (NVDA), Advanced Micro Devices (AMD), Microsoft (MSFT) and Alphabet (GOOGL) sit at the center of these earnings assumptions. Their valuations and forecasts lean heavily on sustained AI capex by hyperscalers and enterprises, supported by abundant and cheap systemwide credit.
Historical episodes roughly 25 years ago show that thematically driven booms backed by policy optimism have tended to persist only while credit markets remained benign. Once corporate credit and high yield spreads widened meaningfully, richly valued US equities, including broad indices like the S&P 500 (SPX), de-rated sharply as growth assumptions were repriced.
Under current conditions, credit markets have not yet signaled serious stress, allowing the bull phase in US equities to continue. However, the linkage between credit availability and equity sustainability implies that a decisive deterioration in credit - via wider spreads or constrained funding - would likely transmit quickly into lower valuations, hitting AI-related sectors and cyclicals tied to strong PMI-style growth expectations hardest.
Terminology
- 01PMI: Survey-based indicator measuring manufacturing and services activity expansion or contraction.
- 02High yield: Corporate bonds with sub-investment-grade ratings, offering higher yields for higher risk.
- 03Credit spreads: Yield difference between risky bonds and safer benchmarks like Treasuries.
References