Exuberance over earnings is becoming a problem for the stock market, according to this Wall Street veteran

By Jamie Chisholm

Heightened optimism about corporate profits often comes before a fall, says Jim Paulsen

Investors are looking ahead to more blowout earnings after Micron's report - but their optimism may be a problem.

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.

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."

Indeed, Paulsen notes that current 12-month forward consensus estimated S&P 500 earnings per share are nearly 90% above the trailing 10-year average reported EPS - the largest premium of estimated EPS to historical average EPS since at least 1990.

Paulsen says there's no way to tell how much today's EPS estimates reflect sustainable company performance versus increasingly reflecting rising investor optimism. Nonetheless, as the first chart demonstrates, "investors cannot be wholly comfortable about continuing to buy the stock market today simply because estimated EPS remain strong," he says.

The markets

U.S. stock-indices SPX DJIA COMP are lower at the opening bell on Wall Street as Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is down, as oil futures (CL.1) slip and gold futures (GC00) are trading around $4,060 an ounce.

 
Key asset performance                                                Last       5d      1m       YTD     1y 
S&P 500                                                              7357.49    -1.91%  -2.73%   7.48%   19.81% 
Nasdaq Composite                                                     25,358.60  -4.37%  -5.79%   9.11%   25.74% 
10-year Treasury                                                     4.381      -7.90   -6.20    20.90   9.60 
Gold                                                                 4067.3     -2.53%  -11.00%  -6.11%  23.77% 
Oil                                                                  69.43      -9.29%  -20.89%  20.94%  6.70% 
Data: MarketWatch. Treasury-yield change expressed in basis points. 

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The buzz

ChatGPT developer OpenAI may push back its initial public offering to next year, according to a report. Shares of major OpenAI investor SoftBank (JP:9984) tumbled 12% in Tokyo.

And the administration of President Donald Trump has reportedly asked the AI lab to limit its next model release over security concerns.

Renewed AI jitters hit the stock markets of South Korea KR:180721, down 5.8%, and Japan JP:NIK, off 4.15%.

Shares of ON Semiconductor (ON) are slumping after the chip maker announced an agreement to acquire Synaptics (SYNA), the AI platform group, for an enterprise value of around $7 billion.

Iran attacked a cargo ship in the Strait of Hormuz as Tehran continues to argue it should have the final say on transit though that choke point.

U.S. economic data due Friday include the final June reading of the University of Michigan's national consumer-sentiment index, released at 10 a.m. Eastern.

SpaceX 'FOMO' is officially over. Space stocks across the board are getting punished.

The chart

Remember when we all believed that the market would be in dire straits if the megacap tech stocks had a wobble? Bespoke Investment notes that, so far in June, all of the top eight tech behemoths have had a rotten time, yet the S&P 500 closed Thursday just 3.3% off the record high touched at the beginning of the month, having gained 7.5% to date in 2026. The moves come after SpaceX's (SPCX) IPO launched on June 11. Did SpaceX, ponders Bespoke, "suck the life" out of its megacap brethren?

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

 
Ticker  Security name 
MU      Micron Technology 
SPCX    Space Exploration Technologies 
NVDA    Nvidia 
TSLA    Tesla 
INFY    Infosys 
MSFT    Microsoft 
AAPL    Apple 
TSM     Taiwan Semiconductor Manufacturing 
SNDK    Sandisk 
AMD     Advanced Micro Devices 

'I met my husband at the Dull Men's Club.'

-Jamie Chisholm

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(END) Dow Jones Newswires

06-26-26 0931ET