Bank of America: Markets expect AI adoption to mirror China's WTO accession; global corporate profits have "decoupled from fundamentals."

According to Mars Finance, a recent report from Bank of America Securities on May 30th pointed out that the corporate earnings expectations behind the record highs in global stock markets have diverged from traditional macroeconomic fundamentals in an unprecedented way. The MSCI World Index's 12-month forward EPS has risen 9% over the past three months, an annualized increase of nearly 40%, while the S&P 500's three-month EPS momentum has risen to 12%, a 40-year high. However, the global PMI has continued to decline to a two-year low of approximately 50.5. More importantly, about two-thirds of this round of earnings revisions comes from the expansion of profit margin expectations, with the European and global 12-month forward consensus profit margins rising to historical peaks of 13.9% and 11.4%, respectively. Bank of America draws a parallel between this anomaly and China's accession to the WTO in 2001—when over 1 billion workers were integrated into the global economy, weakening the bargaining power of workers in developed countries and driving corporate after-tax profits as a percentage of GDP up from 5%-8% to 10%-12%. The market is now betting that the large-scale deployment of AI tools will similarly impact white-collar bargaining power, leading to a structural leap in corporate profit margins, even in the current absence of macroeconomic acceleration. The report lists five undervalued risks: a macroeconomic downturn, a contraction in endogenous demand due to AI substitution, the doubling of the cost of using large-scale model tokens year-to-date, productivity gains potentially taking a decade to materialize rather than being immediate, and the potential for large-scale white-collar unemployment to trigger political backlash and pressure for windfall profits taxes. The market is currently overpricing the near-ideal scenario of "unaffected demand and record profit margins." If a macroeconomic downturn and widening risk premiums materialize, the current profit-driven logic will face the dual challenges of lower profit margin expectations and valuation compression.