U.S. equity markets may extend gains through year-end, but the long-term outlook remains unfavorable, according to a note from BCA Research. Chief Economist Peter Berezin cited record profit margins and elevated earnings growth expectations as unsustainable drivers of current valuations.
Berezin highlighted that Wall Street analysts project record earnings growth underpinned by record profit margins, a combination he described as unlikely to persist. He added that while equities could rise further in the near term, structural challenges outweigh potential upside over a 12-month horizon. The firm noted that risks to equities are skewed downward, though it stopped short of advising a tactical shift into a bear market stance.
The assessment comes amid concerns over U.S. productivity growth, which remained close to its 10-year average in the second quarter. Berezin stated that a sustained acceleration in productivity would be required to justify current market optimism, but recent data provided little evidence of such a trend. He also pointed to the capital-intensive nature of artificial intelligence infrastructure, estimating that companies focused on AI may need to generate $10 trillion in annual revenue to justify the investments being made in data centers—a figure roughly equivalent to global spending on food or healthcare.
Policy uncertainty at the Federal Reserve further complicates the outlook, according to BCA Research. The firm noted that Kevin Warsh’s reluctance to clarify the Fed’s reaction function has increased uncertainty, pushing bond yields higher. With labor market conditions tightening, the likelihood of a sharp decline in yields appears limited, the note added.
Berezin also flagged the recent decline in oil prices, attributing part of the move to widening refining spreads. He described the trend as "not a particularly encouraging sign for the global economy," suggesting it reflects weaker underlying demand rather than a supply-side adjustment.
