Wall Street Divided on AI Outlook: Bulls and Bears Debate Where U.S. Stocks Go Next

According to MarketWatch, the AI investment boom has now lasted three years, delivering the strongest returns for U.S. stocks in decades, alongside an unprecedented concentration in market performance. Yet, Wall Street remains deeply divided: Is this a bubble? How much longer can this rally last? And what will ultimately bring it to an end?

This divergence was starkly revealed in a recent internal debate at BCA Research, involving top economists. A close examination of both sides reveals that market sentiment remains sharply split, underscoring that every investor is already part of this debate—whether they realize it or not.

Peter Berezin, Chief Economist at BCA Research, and Arthur Budaghyan, Head of Core Macro and Emerging Markets Strategist, argue that the biggest risk in U.S. equities today is a "corporate earnings bubble."

During last week’s bull-bear debate, the two stated, "Corporate earnings are indeed strong, but the sustainability of profit margins is not as high as they appear on the surface. Current stock valuations have already priced in near-perfect scenarios, leaving almost no room for positive surprises."

They point out that nearly all valuation metrics indicate U.S. stocks are currently expensive. If corporate profit margins were to revert to 2019 levels, the S&P 500’s price-to-earnings (P/E) ratio would reach 27x—higher than the peak of the dot-com bubble in March 2000, which was around 26.5x.

Even excluding tech and financial stocks, valuations for other sectors remain elevated, trading at 26x P/E, despite only about 3% earnings growth over the past two to three years.

On the massive AI capital expenditures, Berezin and Budaghyan note that large tech firms are investing hundreds of billions of dollars in data centers, specialized chips, power infrastructure, and energy upgrades. While this drives revenue and earnings growth, it is simultaneously eroding free cash flow.

They explain, "Every time an AI chip is sold, the seller records revenue and profit, while the cloud provider buying the chip classifies the expense as capital expenditure, not operating cost. This inflates accounting profits without corresponding cash inflows."

Berezin adds, "I believe AI will ultimately be like electricity. It will improve business efficiency, but if every company can use AI, it doesn’t necessarily make businesses more profitable."

On the other side, Juan Correa, Head of Portfolio Construction, and Noah Weisberger, Head of Equities at BCA Research, take the bullish stance. They argue that the current AI compute market is "supply-constrained, not oversupplied."

They contend that the market is underestimating, not overestimating, the return on AI capital spending. Moreover, AI-driven earnings growth is no longer limited to just a few companies.

According to BCA Research, unfilled orders at major cloud providers have increased by approximately $750 billion over the past two quarters alone—indicating that demand far exceeds current industry supply capacity.

Despite concerns over stretched tech valuations, Correa and Weisberger argue that large cloud operators are currently trading at their lowest valuations in a decade, while profitability continues to improve.

They cite multiple pieces of evidence: rental prices for the latest-generation GPUs continue to rise, cloud computing contract prices have roughly doubled year-on-year, EBIT per employee has clearly improved, and non-core cloud revenues are growing rapidly—such as Meta’s AI-driven ad revenue growth and Google Search’s renewed acceleration.

Correa and Weisberger state, "The market will be surprised over the next two quarters to discover that these capital expenditures are generating far more revenue than expected."

This debate is not about whether AI is real or whether it is transforming the U.S. economy. Both sides agree that AI is profoundly reshaping the U.S. economy through enhanced productivity, shifts in capital allocation, and labor market changes. The disagreement lies in timing: How long can the AI investment boom last? And when the market eventually re-prices, how severe will the correction be?

The bullish camp, Correa and Weisberger, acknowledge, "This AI capex boom will eventually end—and it could end quite dramatically. But for now, economic fundamentals and corporate earnings provide strong support. Therefore, the biggest concern for bulls isn’t recession or earnings collapse, but multiple contraction."

Major U.S. indices closed mostly lower on Monday: the S&P 500 fell 0.2%, the Dow Jones Industrial Average dropped 0.6%, and the Nasdaq was flat.