Wall Street Earnings Kick Off Amid High Valuations and Growing Market Risks
Wall Street faces mounting geopolitical and economic risks as earnings season begins, with Meitav chief economist Alex Zbezinsky warning that investors are overly optimistic and valuations remain stretched.
The Wall Street earnings season officially kicked off this week as investors navigate a complex backdrop of geopolitical uncertainty, elevated oil prices, surging U.S. Treasury yields, and potential further rate hikes by the Federal Reserve.
A reminder of these persistent challenges came when hot U.S. inflation data sent Wall Street tumbling, led by the technology sector. Despite the pullback, the S&P 500 remains not far from its all-time high, prompting a critical question: Are investors realistically pricing in the numerous market risks? Alex Zbezinsky, chief economist at Meitav, believes the answer is no.
"I don't think investors are pricing [the risks] in a sober manner. They remain optimistic anyway," Zbezinsky said. He noted that retail investors' equity exposure is at an all-time high. While retail surveys show pessimism regarding the broader economy, respondents consistently express optimism about the stock market—a disconnect not seen in roughly 40 years.
"Historically, expectations regarding the economy and the market were correlated," Zbezinsky explained. "Today, they are uncorrelated. Institutional investors are also heavily exposed to equities. Having gone 16 years without a real recession or crisis, everyone has gotten used to treating every dip as a buying opportunity."
The Illusion of Low Multiples
Market expectations for the current earnings season remain high, with consensus pointing to a roughly 24% year-over-year increase in earnings per share. However, this growth is heavily concentrated. "This growth is driven primarily by two sectors: technology, where growth is around 70%, and energy, where profitability is expected to surge by 120%-130% due to oil prices," Zbezinsky noted.
Analysts have pointed to recent multiple contraction—where earnings expectations climbed faster than stock prices—as a buying opportunity. According to FactSet, the forward price-to-earnings ratio dropped from 20.5 in July to around 19.
However, Zbezinsky warns that these multiples can be deceptive. "The multiples are not high, but that is somewhat misleading," he said. "They are based on expectations of very high profit growth. If expectations were 'normal,' multiples would be much higher. Looking at the Shiller PE ratio, it is currently sitting around 40—a level seen only once before in history, during the dot-com bubble peak in 1999 when it hit 44."
The AI Revolution and Concentration Risks
The rising concentration of mega-cap tech stocks has triggered a decoupling of the S&P 500 from the average stock, with many individual issues trading significantly below their recent peaks. Goldman Sachs derivatives strategist Brian Garrett recently noted that the index "no longer behaves like the clearing price for risk."
Zbezinsky emphasized that the ultimate success of the artificial intelligence revolution will depend on real-world implementation across traditional sectors. "Right now, the market is focusing on infrastructure builders—hyperscalers, chipmakers, and energy suppliers. But ultimately, if AI does not yield efficiency gains and higher profits across other industries, the revolution will have fallen short."
Furthermore, the market's heavy reliance on a handful of players creates systemic vulnerability. "The market right now lives and dies by tech performance, centering largely on key ecosystem players like Anthropic and OpenAI. If one of them stumbles, the entire chain could fracture," Zbezinsky concluded.
