Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 668

Stop asking if there's a stock market bubble. Ask this instead.

Every week, investors ask some version of the same question: Are we in a bubble?

It's a reasonable question. Stock markets have been at elevated valuations. Geopolitical tension is real. Interest rates remain high by recent historical standards. There's plenty to feel nervous about.

But that question – is there a stock market bubble? – may be the wrong one to ask.

The more important question is this: Is there an earnings bubble?

That distinction matters more than almost anything else right now, because the data tells a story that runs counter to most of the market commentary you’ll hear.

Company earnings aren’t just holding up – they’re accelerating. And in many sectors, earnings growth has actually been outpacing price growth. That’s not what you’d expect from a market in irrational bubble territory. Here’s what the numbers are telling us, and what it means for how you should be thinking about your investments.

The earnings story most investors are missing

Over the past couple of years, something unusual has happened. Global earnings have risen sharply, with forward earnings growth estimates now sitting at close to 25% for 2026 and nearly 18% for 2027. To put that in context: these are not slow, steady gains. This is an earnings acceleration that exceeds what we saw following both the financial crisis and the COVID-era recovery.

What’s driving it? Look at what’s happening across sectors:

  • Technology forecasts have been upgraded by 30%+ this year alone.
  • Communication services have seen earnings upgrades of 20% or more.
  • Energy has seen even larger moves - but for different, more complicated reasons.
  • Crucially, earnings upgrades are now broadening across sectors - not just confined to a handful of mega-cap tech names.

And here’s the thing that should make long-term investors sit up: in most of these sectors, the forward price-to-earnings ratio has actually declined. In other words, stocks have gotten cheaper relative to their earnings – even as prices have risen in absolute terms.

That’s not how a speculative bubble typically behaves.

Why the tech sector warrants a closer look

None of this means everything is straightforward.

Technology – and particularly semiconductors – demands careful scrutiny.

The semiconductor industry is notoriously cyclical. Companies like Micron have, at various points in past cycles, traded at just three or four times earnings at peak – precisely because investors knew a supply glut was around the corner. When new factories come online, supply swamps demand, prices collapse, and earnings follow.

That same dynamic is playing out today, in slow motion. TSMC has flagged roughly a 40% increase in capital expenditure. Samsung is spending 70–80 billion dollars on capex and R&D. SK Hynix and Micron have similar timelines. The supply is coming.

But – and this is the crucial point – most of that new capacity isn’t coming online until 2027 or 2028. Which means the supply constraints that are driving extraordinary semiconductor earnings right now are likely to persist for at least the next 12 to 18 months, possibly longer.

The memory sector alone is a striking illustration: revenues were roughly $200 billion in 2025, are forecast at $600 billion in 2026, and projected to approach $800 billion in 2027. Much of the 2026 number is already contracted. This isn’t speculation – it’s supply chain reality.

That said, long-term analyst forecasts are starting to look crazy. No sector sustains that pace forever.

Analyst forecasts at cycle peaks tend to reflect euphoria, not fundamentals. When the cycle turns, the revision will be sharp.

Some stocks, NVIDIA, for example, have an argument for a sustained period of higher margins due to a mix of technological leadership and growing AI demand. For most of the sector, though, that argument does not stack up. There is enough competition and technological parity among the leading stocks that margins will eventually return to trend.  It is just a question of when the supply arrives.

The multiplier effect: Why this is bigger than just tech

Here’s where the narrative gets more interesting.

For most of the past several years, major tech companies – think Google, Meta, Microsoft – were sitting on vast cash reserves. They were generating enormous profits but not deploying them into the real economy. Share buybacks, debt reduction, cash accumulation.

Economically, that’s a drag: money being pulled out of productive circulation.

That’s now changing, rapidly.

These same companies are raising capital, taking on debt, and spending heavily on data centres – infrastructure that represents more than 2% of US GDP in new capital expenditure. And capital expenditure has multiplier effects. The data centre needs electricians, construction workers, logistics, and materials. Those workers spend their wages. Those wages flow through local economies. Other sectors are beginning to see the benefits.

This is what’s driving the earnings broadening we’re now observing. The consumer sector remains under pressure – household budgets are squeezed by higher prices and interest rates. But company earnings across a broader range of sectors are growing, because AI infrastructure spend is flowing outward into the wider economy.

The result is a curious disconnect: a consumer sector that’s struggling, alongside corporate earnings that are accelerating. Both can be simultaneously true when capex-driven multiplier effects are at work.

Now the multiplier will one day go into reverse – but for now the effects are positive.

Three things that could derail this

Being invested in a rising earnings environment makes sense. But “the earnings are strong right now” is not the same as “nothing can go wrong.”

There are three macro risks that deserve close monitoring:

1. Inflation and interest rates
If inflation re-accelerates – driven by supply chain pressures, wage growth, or fiscal stimulus – central banks will respond. Higher rates compress consumer spending and increase borrowing costs for the very companies now spending heavily on infrastructure. This is the most obvious risk.

2. Oil prices
The energy sector’s earnings surge looks impressive on a chart, but rising oil is a cost for nearly every other sector and every consumer. If geopolitical tensions in the Middle East escalate and oil approaches $200 a barrel, that’s not a sign of economic health – it’s a warning of potential recession and demand destruction.

3. The earnings cycle turning
The most important risk is internal to the market itself. Right now, markets are pricing in strong earnings growth – and getting it. But the valuation math is unforgiving when the cycle turns.

Here’s a simple illustration: if earnings growth this year comes in at 25% as expected, but next year’s growth slows from an expected 18% down to 8%, you face a double compression. Earnings expectations fall by 10%. And investors, no longer willing to pay a premium multiple for high growth, reprice the market down. You can easily construct a scenario where that combination produces a 20% drawdown –10% from earnings downgrades and 10% from valuation compression.

The good news? We’re not seeing signs of that turn yet. The earnings growth looks durable for now. But it bears watching carefully.

What this means for you as an investor

There’s a clear takeaway here, and it runs counter to the instinct to “wait for a pullback” or stay on the sidelines while markets feel elevated.

When earnings are growing at the 99th percentile of historical rates, it’s reasonable – arguably rational – to accept valuations at the 80th percentile. You’re paying a premium for genuinely exceptional growth. That’s not a bubble; that’s a defensible price for real earnings power.

The risk is not that prices are high today. The risk is being slow to identify when earnings begin to roll over – and being caught holding high-multiple stocks at precisely the moment the growth justification disappears.

That’s why the focus needs to be less on price levels and more on earnings sustainability. Watch the data. Watch semiconductor capex timelines. Watch whether the broadening of earnings beyond tech continues. Watch oil and rates.

The investors who will do best through this period are not those who predicted a correction at every high, but those who stayed invested through strong earnings periods and had a clear, evidence-based framework for when to reduce risk.

The bottom line

Stop asking whether there’s a stock market bubble. Start asking whether there’s an earnings bubble.

Right now, the honest answer is: not obviously. Earnings are strong, growing, and broadening. Valuations, while elevated in absolute terms, are not extreme relative to those earnings. Supply constraints in semiconductors will persist for 12 to 24 months. AI capex is generating real multiplier effects across the economy.

There are warning signs – particularly in analyst euphoria around long-term tech growth projections and the cyclical risks in semiconductors. But the near-term picture is more solid than the bear case would suggest.

 

Damien Klassen is the Chief Investment Officer at Nucleus Wealth. This article is general information and does not consider the circumstances of any investor.

 

  •   24 June 2026
  • 6
  •      
  •   
6 Comments
Nadal
June 25, 2026

Perhaps cashflow is a more important metric than earnings (the latter including unrealised gains, the former doesn't).

2
Jeff O
June 28, 2026

PS - Investment in data centres (buildings, chips, using energy to compute, generate AI etc) ....and in turn AI GDP/ output/activity in the real world is not being justified in terms of discounted cash flow by the entrepreneurs/builders/ investors.

Currently, no agents know...the (long run) cashflows with any high degree of confidence but ironically, markets are willing to back the future activity/ funded via securities....and there is a significant chance of over spending

It's arguably best modelled by a call option on the vision /promise by a number of entrepreneurs et al to replace human labour and with AI; that's also impossible to do at this time with any confidence.

Some of these centres/AI activities may well become stranded/ worthless, while others will be valuable, notwithstanding, the likelihood of overbuilding reflecting the exuberance/ ready finance underpinning the current investment activity

Watch the demand for tokens and prices - the currency for access to AI activity - and the associated generated profit or loss.

Real applications are rising at an exponential rate - hopefully, these will be (net) value added activity . If not, this systemic investment will crash/correct, with some winners/value added activities but lots of losers.

3
john
June 28, 2026

Over a year ago I predicted the drop in the market when trump presented his tariff hikes on other countries. I was proved right and it was a good time for several months to be out of the market.
My next prediction is there will be a far larger drop in the market when trump leaves office. Not because of normal market forces but because the heavyweights in the market especially, will wilfully force the market down - because they 'Can".

2
Jeff O
June 28, 2026

Not obviously - concludes author

Bubbles are only obvious to insiders with the intelligence and skill to know why buyers are buying and overpaying and selling at high prices

The outsiders can quickly turn and quickly become sellers - when the narrative, the facts, etc obviously change

1
Trevor S
July 08, 2026

Excellent article Damien, in rationalising complex and unusual market dynamics.

 

Leave a Comment:

RELATED ARTICLES

Valuing AI: Extreme bubble, new golden era, or both

Where to hide in the ‘everything bubble’

US shares: Ambitious multiples on ambitious EPS forecasts

banner

Most viewed in recent weeks

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

Meg on SMSFs: The CGT changes don’t impact super but what about Div 296 tax decisions?

New CGT rules could tip the scales in the super vs non-super debate. For those facing the Division 296 tax, the case for withdrawing has gotten more complex. A "comparison rate" tool may help assess decisions.

The strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

Welcome to Firstlinks Edition 667 with weekend update

The downfall of the giant and three lessons for investors.

  • 18 June 2026

Latest Updates

Latest from Morningstar

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Economy

Was life really better in the good old days?

Are we worse off than previous generations? Lately, there seems to be a heightened level of angst that economic conditions are getting harder and that the two-party political system (and maybe democracy too) is failing voters.

Retirement

Australia has saved $4.5 trillion for retirement. Here's what matters more

Most Australians approaching retirement can tell you the exact dollar value of their super account. But success depends on more than a sizeable balance. Here's four key questions to ask yourself at the start of the financial year. 

Who gains in an AI-supercharged economy?

AI is already reshaping the economy, but companies building transformative technologies rarely capture the greatest long-term value. Instead, those benefits accrue to the users. We may well see this pattern reproduced. 

Taxation

Div 296's million-dollar reset worth $25,000

The 'cost base reset' for the new super tax is being sold as protection for pre-July gains. A worked example shows $1M of protection is worth about $25,000, and the real deadline has not passed.

Latest from Morningstar

The forecasting fix that Wall Street missed

Asking whether markets are overpriced may be the wrong question. New research suggests that traditional valuation metrics used to forecast returns may have been misread. Here are five takeaways for investors.

Investment strategies

Should a fund manager invest their own money differently?

Investors often like the idea that fund managers should invest client money exactly as they invest their own. But reality is more complicated. Unique circumstances make a different approach rational and, at times, beneficial.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.