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https://content.fortune.com/wp-content/uploads/2023/07/GettyImages-1356845314-e1688663384835.jpg?w=2048Rising stocks, the potential for sustained economic growth, and a productivity-enhancing A.I.-induced “4th industrial revolution” have many analysts screaming buy, but Société Générale’s Albert Edwards remains cautious. “The U.S. tech sector has surged on the back of what may prove to be nothing but hope—mainly AI related,” the global strategist for the historic French investment bank wrote in a Wednesday note. “Actual earnings are poor in absolute and relative terms.” Edwards may be worth listening to for more than his bearish disposition—he’s been a loud voice this year questioning the direction of capitalism itself.
The strategist is a proponent of “greedflation”—the idea that corporations used the war in Ukraine and the pandemic as excuses to increase profit margins. In April, he argued that corporations’ “super-normal profit margins” were exacerbating inflation and could even eventually “inflame social unrest.” “The end of Greedflation must surely come. Otherwise, we may be looking at the end of capitalism,” he said. “This is a big issue for policymakers that simply cannot be ignored any longer.”
Edwards also noted that the surge in corporate profits during the pandemic may have helped to delay the long-predicted U.S. recession, leading some economists and analysts to develop an overly optimistic view of the path ahead for the economy.
A few months later, looking back on the blowout first half of the year in stocks, Edwards remains concerned about fundamentals. In his view, the latest market rally has been driven by Wall Street analysts’ earnings-per-share forecast upgrades amid enthusiasm over A.I. and the potential for the U.S. to avoid a recession. But despite analysts’ bullishness, the strategist warned that corporate profits are actually falling, which means avoiding a recession may be easier said than done.
To his point, after-tax U.S. corporate profits have fallen 11.7% from their peak in the second quarter of 2022. And after posting record profits in 2021, Fortune 500 companies saw their profits sink roughly 15% to $1.56 trillion last year even amid record revenues.
“Rising optimism among analysts is not always to be trusted,” Edwards explained, noting that in 2014, there was a similar spike in analysts’ forecasts, but the bullish outlook never turned into real earnings growth. Eventually that forced many Wall Street leaders to cut their bullish earnings estimates, and stocks suffered as a result. Now, Edwards is asking: “Have analysts again become too overexcited about a recession averted?”
He also pointed to the fact that the tech sector now represents more than 30% of the S&P 500’s market capitalization after its rise this year. “Of all the strange things I have seen over the years, that looks simply nuts,” he wrote, noting that in 2020 the sector represented less than 20% of the blue-chip index.
As Fortune previously reported, a number of analysts and market-watchers fear that the recent A.I. hype helping to push tech shares higher is overdone. It’s not that A.I. doesn’t have long-term potential, they say, but rather that investors tend to get ahead of themselves when projecting the real impact on corporate earnings from the rise of new technologies.
“It’s FOMO [fear of missing out], and more and more stocks are moving to ridiculous heights…Investors just have to be really careful,” David Trainer, co-founder of the investment research firm New Constructs, said of the phenomenon.
Investors ignore economists’ recession warnings ‘at their peril’
For over a year now, Wall Street economists, billionaire investors, and former Federal Reserve officials have warned that a recession is on the way. But despite their bearish outlooks, inflation is slowly fading, U.S. GDP growth was just revised up to 2% for the first quarter, small businesses’ expectations for hiring and revenue growth are at record levels, and the labor market remains robust. The payroll processing company ADP even reported this week that the U.S. economy added 497,000 jobs in June, more than double the 225,000 consensus forecast from Wall Street.
Edwards admitted in his Wednesday note that “U.S. economic data has generally surprised on the upside over the last couple of months,” and that many of his peers have turned increasingly bullish as a result.
“Although some investors have pushed back the timing of their recession forecasts, others, sick of being called naysayers, have given up on forecasting recession altogether,” he wrote. “This is quite normal. The pressures on economists to avoid being early (aka wrong) with a recession call are intense, especially on the sell-side, where they will quickly throw in the towel.”
But Edwards isn’t giving up on his recession forecast. “As cyclical optimism grows, investors are giving up on recession at their peril,” he warned. “Economists, having apparently got their recession call wrong, always give up on it just at the point when it arrives.”
Edwards referenced his experience in 2007, when he, as a self-titled “uber bear,” began to doubt his own recession forecast amid bullish predictions from his peers. “But I’ve seen this show before, and I’m not wavering now,” he wrote Wednesday.
