Pyrspectives – Profits are at record highs – Are markets too optimistic?

Record corporate profits are masking fragile fiscal and household-spending foundations, leaving equities vulnerable as bond yields and geopolitical risks rise.

• MSCI ACWI forward 12-month earnings have risen 38% over the past year, trailing EPS has grown 30%, and 92% of constituents are expected to report positive earnings growth next year versus an 80% historical average.
• The US profit share of GNP is at a record high, driven chiefly by a 6% fiscal deficit and falling household savings; 100% bonus depreciation in the One Big Beautiful Bill Act may amplify the eventual fiscal tightening when capital expenditure slows.
• The AI investment boom is transferring profits from hyperscalers to equipment suppliers, while Nvidia A100 and H100 GPU rental prices peaked in September; the durability of hyperscaler earnings depends partly on GPU useful lives and depreciation.
• With the 10-year Treasury yield at 5.3%, forward earnings offer roughly no equity risk premium, while cyclically adjusted earnings imply a -2.8% premium; even a 2.9% 10-year TIPS yield leaves equities expensive.
• The yen rose from about ¥164 to ¥156 after US-Japanese intervention on 31 July 2026 but fell back toward ¥160, while Japanese investors bought more than ¥5 trillion of overseas assets in the following two weeks; a lasting recovery requires a narrower US-Japan rate gap.
• Brent above $100, yields above 5%, refinery damage and disruption in the Strait of Hormuz and Bab al-Mandab threaten growth and profits, although a resolution of the Russia-Middle East conflicts could sharply lower oil prices and provide an asymmetric boost to risk assets.

Takeaway: Investors should treat current equity valuations and profit growth cautiously, prepare for further pressure if oil and yields keep rising, and view the yen and risk assets as more attractive only if monetary policy, geopolitics or capital flows provide the necessary catalysts.